Free lesson · Lesson 15 in the app
Compound Interest: The Magic of Money Growing
Earning interest on your interest, and why it snowballs over time.
About 8 minutes · 10-question quiz · Ages 10 and up
Learn
Albert Einstein supposedly called it "the eighth wonder of the world." Nobody can prove he said it, but the idea behind the quote is real.
It's called compound interest. Warren Buffett built his fortune on it, and it's the reason starting young matters so much.
It isn't complicated. Once you see how it works, you'll never look at saving the same way again.
Simple vs Compound Interest
Lesson 14 showed how a bank pays you interest. Say you save £100 at a round, made-up rate of 10% a year, to keep the sums easy. (Real savings rates are usually lower.)
Simple interest, from Lesson 14, pays you only on the money you first put in. You get £10 each year, so after two years you have £120.
Compound interest pays you on your interest too. After one year you have £110. The second year pays 10% of that bigger amount, so you end with £121.
That extra pound is interest earned on your interest. It looks tiny. Watch what happens when it keeps going.
The Snowball Effect
Compound interest works like a snowball rolling downhill. The bigger it gets, the more snow it picks up with each turn.
Investments can snowball the same way, as their growth earns growth of its own. Over the long run, shares have grown by about 7% a year more than prices rise (Lesson 8) - history, not a promise.
Leave £100 to grow like that for 50 years, without adding another penny, and it becomes nearly £3,000.
Now look at when the growth arrives. The first 10 years add about £100. The last 10 add nearly £1,500.
Most of the growth comes late. The snowball needs a long hill.
The Rule of 72
Here's a handy shortcut for how long money takes to double: divide 72 by the yearly rate. So at 6%, money doubles in about 12 years.
It's an estimate, not exact, but it's close enough to be useful.
It also shows why small differences in rate matter. A slightly higher rate squeezes more doublings into the same number of years.
And because each doubling is bigger than the one before, one extra doubling at the end is worth a lot. Keep that in mind for the next section.
Why Starting Young Matters
At 7%, the Rule of 72 says money doubles about every 10 years.
Remember Person A and Person B from Lesson 8? They invested the same amount at the same rate. A started 10 years earlier and ended up with about twice as much. Those extra years gave A's money one extra doubling.
It's also why over 99% of Warren Buffett's wealth came after his 50th birthday (Lesson 9). His snowball had been rolling since he was a boy, so every late year added a huge amount.
The early years don't grow much on their own. What they do is buy you the big years at the end.
Compound Interest Works Against You Too
Here's the flip side. When you borrow money, you pay interest. And unpaid interest compounds too, working against you instead of for you.
Credit cards often charge more than 20% a year. At that rate, the Rule of 72 says an unpaid debt doubles in under four years. The snowball is now rolling the wrong way.
That's why a good money plan gets compounding working for you, through saving and investing, and not against you, through expensive debt.
Practice
No marks here. Have a think, or talk it through, then open a model answer.
Simple vs Compound
You put £200 away at a made-up 10% a year for three years.
Question: How much do you have at the end with simple interest? And with compound interest?
Use the Rule of 72 to see how long money takes to double at different rates. What do you notice?
The Two Cousins
Two cousins each get £200 for their 16th birthday.
Cousin A invests it and leaves it alone to grow until 65.
Cousin B spends it on clothes and gadgets, planning to "invest later when I have more money."
Question: Roughly how much might Cousin A have by then? What did Cousin B really give up?
Try the quiz
Pick an answer to see if it's right, and why.
Question 1 of 10
What is compound interest?
Question 2 of 10
You save £100 at 10% compound interest. After 2 years you have:
Question 3 of 10
True or False: Most of the growth from compound interest happens in the early years.
Question 4 of 10
What is the Rule of 72?
Question 5 of 10
At 6% a year, roughly how long does it take to double your money?
Question 6 of 10
True or False: Warren Buffett earned over 99% of his wealth after age 50.
Question 7 of 10
Why does starting 10 years earlier make such a big difference?
Question 8 of 10
Compound interest works against you when:
Question 9 of 10
Compound interest is called "the eighth wonder of the world." What does it need most to work its magic?
Question 10 of 10
£100 left alone at 7% a year grows to nearly £3,000 in 50 years. What does this show?
10 questions. Nothing is saved, so have a go.
Where a lesson mentions another lesson by number, the free ones are linked. The rest are in the app.
Keep going in the app
In Squids-In, children work through more than 100 short lessons like this one, in order, alongside a friendly investing game. You can see how they're getting on. It's free while we test it with a small group of families.