For people who can save a modest amount each month and want to see, in concrete numbers, what time and rate do to that habit. The point of this guide is the worked examples — the same £200 a month mapped across horizons and rates — rather than theory. For the underlying concept and the Rule of 72, the complete compound interest guide is the companion.
Why monthly deposits change the shape of growth
A lump sum left alone compounds, but adding fresh capital every month keeps expanding the base that interest is calculated on. Early on, your contributions dominate the balance; later, the interest earned on past interest overtakes what you put in. The crossover — where growth exceeds contributions — is the moment compounding takes over.
The same £200/month across horizons and rates
Illustrative figures, rounded, assuming contributions made monthly and interest compounded monthly. They are not projections of any specific account.
| Horizon | Contributed | At 1% (current account) | At 4% (Cash ISA) | At 7% (index fund, illustrative) |
|---|---|---|---|---|
| 10 years | £24,000 | ≈ £25,200 | ≈ £29,500 | ≈ £34,600 |
| 20 years | £48,000 | ≈ £52,900 | ≈ £73,300 | ≈ £104,100 |
| 30 years | £72,000 | ≈ £83,600 | ≈ £138,600 | ≈ £243,900 |
Two things stand out. First, the gap between 4% and 7% over 30 years is enormous — £105,000 — even though the rate difference is only 3 points. Second, in the 30-year/7% row you contributed £72,000 and the balance is £243,900: roughly £172,000 of the final pot came from compounding, not from you.
Time beats extra capital
Starting earlier with less usually beats starting later with more. A 25-year-old saving £150 a month until 65 has 40 years of compounding; a 45-year-old saving £450 a month until 65 has 20 years and three times the monthly outlay — and typically ends with less, because the older saver missed two decades of compounding on the early contributions. The lesson is unglamorous: start now, even if the amount is small.
Three things that quietly destroy compounding
- Withdrawing mid-course. Pulling money out to buy a car resets the base that future interest would have compounded on. Keep a separate sinking fund for planned spending.
- Waiting until you can afford "enough." £50 a month for 30 years beats £0 a month while you wait to afford £200.
- Ignoring inflation. If cash earns 3% and inflation is 4%, real purchasing power falls. For horizons over 5 years, investments have historically delivered the higher real returns needed for compounding to work in your favour.
Cash or invest?
Money you need within 5 years (a house deposit, an emergency fund) belongs in cash to avoid selling after a market fall. Money you can leave for 10+ years has historically grown more in diversified investments, at the cost of short-term volatility. Inside an ISA, all the growth is tax-free; outside one, basic-rate payers pay tax on interest above £1,000 a year.
Run your own numbers
Plug in your deposit, monthly contribution and expected rate with the Compound Interest Calculator, or reverse-engineer the monthly amount needed to hit a target with the Savings Goal Calculator.
Assumptions and limitations
The 7% figure is an illustrative long-run average based on historical global stock-market returns; past performance does not guarantee future results, investments can fall as well as rise, and you may get back less than you put in. Cash rates fluctuate with the Bank of England base rate. Consider your risk tolerance and time horizon, and seek independent financial advice before allocating capital to equities.
Written and maintained by Shaun da Silva, Finance Consultant. Learn how we ensure accuracy and quality in our Editorial Policy.