Compound Interest FAQs
What is the difference between compound and simple interest?
Simple interest is paid only on your original deposit, so £10,000 at 5% simple interest earns exactly £500 every year. Compound interest is paid on your deposit plus all the interest already earned, so the £500 earned in year one itself earns interest in year two. Over 20 years, £10,000 at 5% grows to £20,000 with simple interest but to over £26,500 with annual compounding. The longer the term, the bigger the gap · which is why compounding is often called the most powerful force in saving.
What does AER mean on UK savings accounts?
AER stands for Annual Equivalent Rate. It shows what you would actually earn over a year once compounding is taken into account, so accounts with different compounding frequencies can be compared fairly. An account paying 4.9% gross compounded monthly has an AER of about 5.01%. UK providers must quote AER, so when comparing accounts always compare AER with AER rather than gross rates. This calculator shows the effective APY for your chosen rate and frequency · that figure is directly comparable to a quoted AER.
Does monthly compounding beat annual compounding?
Yes, at the same nominal rate more frequent compounding earns slightly more, because interest starts earning interest sooner. At 5% nominal, annual compounding yields exactly 5.00%, monthly compounding yields about 5.12%, and daily compounding about 5.13%. The difference is real but small · a fraction of a percent · so a higher headline AER almost always matters more than the compounding frequency behind it. Try switching the frequency selector above to see the effect on your own numbers.
What is the rule of 72?
The rule of 72 is a quick mental shortcut for estimating how long money takes to double with compound growth: divide 72 by the annual rate. At 6% your money doubles in roughly 72 / 6 = 12 years; at 4% it takes about 18 years; at 9% about 8 years. It is an approximation but remarkably accurate for rates between 2% and 12%, and it makes the power of even small rate differences obvious.
For informational purposes only · Not financial advice · Projections assume a constant interest rate and regular contributions · Interest on savings outside an ISA may be taxable above your Personal Savings Allowance (£1,000 basic rate / £500 higher rate / £0 additional rate in 2026/27)