Investing Basics
Compound Interest Explained: Why Starting Early Wins
Albert Einstein supposedly called it the eighth wonder of the world. Whether or not he did, compound interest is the engine behind almost all long-term wealth.
What compound interest actually is
Compound interest is the interest you earn on your interest. In year one you earn a return on your original money. In year two you earn a return on your original money plus year one's gains. Over decades this snowball effect becomes enormous, and it is why a pound invested in your twenties is worth far more at retirement than a pound invested in your forties.
Key takeaway
£100 a month invested from age 22 can comfortably beat £200 a month invested from age 35, despite the second person putting in more cash overall. Time, not the amount, does the heavy lifting.
A concrete UK example
Assume a 10% average annual return, which is roughly the long-run average of global stock markets before inflation.
| Investor | Monthly | Total paid in by 65 | Pot at 65 |
|---|---|---|---|
| Starts at 22 | £100 | £51,600 | ~£640,000 |
| Starts at 35 | £200 | £72,000 | ~£430,000 |
The early starter pays in less money but ends up with far more. That difference of over £200,000 is compound interest doing its work over the extra 13 years.
See it for yourself
Our ISA calculator shows how your pot grows year by year, and how much of it is your money versus pure growth.
Open the ISA CalculatorThe rule of 72
A quick mental shortcut: divide 72 by your annual return to find how many years it takes your money to double. At 10% a year, your money doubles roughly every 7.2 years. At 7%, about every 10 years. This is why even small differences in return, compounded over decades, produce very different outcomes.
The practical lesson
You do not need a large income to build real wealth. You need time, consistency and a tax-efficient home for your money such as a Stocks and Shares ISA. The best day to start was years ago. The second best day is today.
Frequently asked questions
What is compound interest in simple terms?
Compound interest is earning interest on your interest. Each year your returns are calculated on a larger and larger balance, so your money grows faster and faster over time. It is the main reason long-term investing builds wealth.
Why does starting early matter so much?
Because compounding accelerates over time. Money invested in your twenties has decades to double and redouble. Someone starting at 22 with £100 a month can end up with more than someone starting at 35 with £200 a month, despite paying in less.
What is the rule of 72?
The rule of 72 is a shortcut: divide 72 by your annual return to estimate how many years it takes your money to double. At a 10% return, money doubles roughly every 7.2 years.
This guide is for general education only and does not constitute financial advice. Tax rules and figures are based on the 2024/25 UK tax year and may change. Always consider speaking with an FCA-registered adviser about your own circumstances.