Compound Interest
Plain-English definition of Compound Interest — part of our investing glossary.
Definition
Compound interest is interest earned on both the original principal and on previously earned interest. Over short periods the effect is small, but over decades it becomes the dominant force in investment growth — a 5% annual return doubles your money in roughly 14 years.
Worked example
£5,000 invested at 7% real return becomes roughly £9,836 after 10 years, £19,348 after 20, and £38,061 after 30. Most of the growth arrives in the final decade — this is why starting early matters more than contribution size.
Why it matters
Investing is unusually unforgiving of vocabulary gaps. Costs compound, inflation compounds, and the gap between a "5% return" and a "5% real return after 0.3% fees" is the difference between a comfortable retirement and a tight one.
Common mistake
Focusing on nominal returns and headline past performance rather than fees, tax wrappers, and real (post-inflation) returns. A cheap tracker inside an ISA almost always beats an expensive active fund in a taxable account over 20+ years.
Calculators that use this concept
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See also
- Pound Cost Averaging — Investing a fixed amount at regular intervals regardless of price, rather than investing a lump sum at one tim…
- Gilt (UK Government Bond) — A gilt is a UK government-issued bond. Short-dated gilts are generally considered one of the safest investment…
- CPI Inflation — The Consumer Prices Index measures the average change in prices of a representative basket of UK goods and ser…
- Real vs Nominal Return — A nominal return is the headline investment return. A real return is the nominal return minus inflation. A 7% …
- Expense Ratio (OCF/TER) — The annual cost of holding a fund, expressed as a percentage of assets. A 0.2% expense ratio on £100,000 is £2…