How compound interest works for savings and debts, why time matters so much, and how to use it in your favour.
Looking for more detail? Our full guide covers this topic in depth, with step-by-step advice and sources.
Compound interest means you earn interest on your interest. Over time, it makes savings grow faster, and debts grow faster too.
A simple example
Put £1,000 in an account paying 4% AER. After one year you have £1,040. In the second year you earn interest on £1,040, giving £1,081.60. After 10 years you would have about £1,480, assuming the rate stayed the same.
Time is the biggest factor
£100 a month invested at an assumed 5% a year grows to about £15,500 after 10 years, but about £41,100 after 20. Starting earlier makes a large difference. Investment returns are not guaranteed and can be negative.
It works against you on debt
Unpaid credit card interest is added to the balance, and then charged interest itself. Paying only the minimum can keep you in debt for years.
Using it in your favour
- Start saving early, even small amounts.
- Reinvest interest and dividends.
- Keep fees low on investments and pensions.
- Pay off expensive debt first.
- Use ISAs and pensions to keep growth free of tax.
The rule of 72
Divide 72 by the annual rate to estimate how many years it takes to double. At 6%, about 12 years.
General information, not financial advice. If you need personal advice, use an FCA-regulated adviser.
Sources and further reading
Facts checked on 20 October 2026. Spotted an error? Tell us and we will correct it.