Compound Interest — The Dollar Dictionary

Ads end in 20 seconds

Loading location...

This content is free thanks to our sponsors

Sponsored Ad – I may earn a commission if you click and buy

Next ad in 5s

You are about to visit an external website.

This is an affiliate link, and we may earn a commission.

Continue?

Finance

Compound Interest

Earning interest on both the original principal and the interest already accumulated — meaning your money grows at an accelerating rate over time.

Simple interest is boring: 5% on £1,000 gives you £50 every year, forever. Compound interest is the cheat code: in year one, you earn £50. In year two, you earn 5% on £1,050 — that's £52.50. The next year, you're earning on £1,102.50, and so on. The difference feels small early on but becomes dramatic over decades.

The key variables are rate of return and time. A higher rate is good; more time is better. A useful shortcut is the Rule of 72: divide 72 by your annual return rate, and that's roughly how many years it takes to double your money. At 8%, money doubles every 9 years. At 4%, every 18 years.

Compound interest is the financial equivalent of a snowball rolling downhill. Start small, and it barely grows. But keep rolling it long enough — down a long enough hill — and it becomes unstoppable. The longer you let it roll, the bigger it gets. Albert Einstein reportedly called compound interest the "eighth wonder of the world." Whether he said it or not, the math is undeniable.

Real world: If you invest £1,000 at age 15 and earn 8% per year, by age 65 you'll have over £46,000 — without adding another penny. Wait until age 25 to start, and the same investment grows to only £21,000. That 10-year delay cut your final amount in half. Compound interest is ruthlessly rewarding to the patient and punishing to the procrastinator.

💡 Compound interest doesn't care about your income — it only cares how early you start and how long you stay patient.

← Back to The Dollar Dictionary