Frequently Asked Questions
What is compound interest?+
Compound interest is interest earned on both your original investment and the interest already accumulated. Unlike simple interest (which only earns on the principal), compound interest snowballs over time — the longer you leave it, the faster it grows. Einstein allegedly called it the "eighth wonder of the world."
What annual return rate should I use?+
For a globally diversified index fund, the historical average return is approximately 7–10% per year before inflation, or roughly 4–7% after inflation. Conservative investors often use 5–6% for planning purposes. Cash savings accounts currently offer 4.5–5.1%. Remember: past returns don't guarantee future results.
How does compounding frequency affect my returns?+
The more frequently interest compounds, the more you earn. Daily compounding produces slightly more than monthly, which beats quarterly, which beats annual. In practice, for long-term investments the difference is small — the rate and time period matter far more. For savings accounts and bonds, check how often your provider compounds.
How much should I invest each month?+
A common rule of thumb is to invest at least 15–20% of your take-home pay. If that's not possible, start with whatever you can — even £25/month. The habit matters more than the amount early on. Use our calculator to see how small monthly contributions compound into substantial sums over decades.
Does this account for inflation?+
This calculator shows nominal returns (before inflation). To estimate real returns, subtract inflation (typically 2–3%) from your annual rate. For example, if you expect 7% returns with 3% inflation, enter 4% as your rate to see inflation-adjusted growth in today's money.
Is compound interest the same as compound growth?+
They follow the same mathematical principle. "Compound interest" typically refers to savings accounts or bonds. "Compound growth" refers to the reinvestment of dividends and capital gains in an investment portfolio. Both benefit from the same exponential growth formula used in this calculator.