What Compound Interest Actually Is
Compound interest is interest earned on interest. Instead of only earning a return on your original investment, each period's gains are added to the balance, and the next period's return is calculated on that larger amount. Over enough time, this creates growth that accelerates rather than staying flat.
A £10,000 investment growing at 7% a year isn't worth £10,700 after ten years — it compounds to roughly £19,700, because every year's growth builds on the last.
Why Time Matters More Than the Rate
Starting early is often more powerful than chasing a higher return. Someone who invests consistently from their twenties, even at modest returns, frequently ends up with more than someone who starts a decade later at a higher rate — simply because compounding needs time to do its work.
Monthly contributions add up fast
Regular contributions compound alongside your initial investment. FinCalc's Compound Interest Calculator lets you model an initial lump sum plus ongoing monthly or annual contributions, at daily, monthly, quarterly, half-yearly or annual compounding frequencies.
The Inflation Problem: Nominal vs Real Returns
Here's the part many calculators ignore: a future value in tomorrow's money buys less than the same number today. If your portfolio grows to £100,000 in 20 years but prices have also risen over that time, that £100,000 doesn't have £100,000 worth of today's purchasing power.
The real (inflation-adjusted) future value tells you what your nominal result is actually worth in today's terms:
Real Future Value = Nominal Future Value ÷ (1 + Inflation Rate)Years
FinCalc's Compound Interest Calculator now includes an "Adjust for Inflation" option that shows both figures side by side, along with the purchasing power lost to inflation — so you can plan using numbers that actually reflect future spending power.