Compound Interest Explained: Why Starting Early Beats Saving More

Simple interest pays on the original amount. Compound interest pays on the original amount plus all interest already earned. That single difference turns a straight line into a curve, and over decades the curve dominates everything else.

The gap, concretely

£10,000 at 7% for 30 years:

• Simple: £10,000 + (£700 × 30) = £31,000
• Compound: £10,000 × 1.07³⁰ = £76,123

The £45,000 difference is interest earning interest. No additional money was contributed.

Frequency: real, but overrated

£10,000 at 5% for 10 years:

Annual to monthly gains £181. Daily to continuous gains under a pound. Rate and time matter far more than frequency — a common misconception is that daily compounding is a meaningful advantage.

The Rule of 72

Divide 72 by the rate for approximate doubling time:

Accurate enough for mental checks between about 4% and 12%, and the fastest way to test whether a growth claim is plausible.

Why ten years early beats three times the money

Two savers, both at 7%:

Ama saves £200/month from 25 to 35, then stops. Contributed: £24,000. Ben saves £200/month from 35 to 65. Contributed: £72,000.

At 65: Ama has roughly £300,000. Ben has roughly £244,000.

Ama contributed a third as much and finished ahead, because her money compounded for thirty extra years. This is the strongest possible argument for starting early, and it is arithmetic rather than motivation.

What quietly destroys it

Inflation

A 7% nominal return with 3% inflation is about 4% real. Over 30 years that is the difference between 7.6× and 3.2× your money in purchasing power. Always reason in real terms over long horizons — see the inflation calculator.

Fees

A 1% annual fee sounds trivial. Over 30 years at 7% it removes roughly a quarter of the final balance, because the fee compounds alongside the returns. This is the strongest practical argument for low-cost index funds.

Interrupting it

Withdrawing and restarting resets the curve to its flat beginning. Compounding rewards being left alone more than it rewards being optimised.

The same force in reverse

Credit card debt at 22% APR compounds against you. £5,000 left unpaid becomes roughly £6,100 after a year and £11,000 after four. The credit card payoff calculator shows why paying high-interest debt usually beats investing.