How compound interest actually works

A plain explanation of compounding, with the maths shown step by step so you can check the numbers yourself.

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Written by adminPublished September 30, 2026Reading time 1 minute read

Start with a simple sum and watch it grow. The example below walks through each year so you can verify the arithmetic.

What 20 percent compounding looks like

Assume a starting balance, a fixed monthly contribution and a fixed annual return.

A 20 percent return is not realistic and is used here only to make compounding visible.

Why the starting point matters

The earlier a sum begins compounding, the larger the base becomes, and the more of the final balance comes from growth rather than deposits.

Does compounding apply to savings accounts?

Yes, but usually at a lower rate than investments, so the effect is much smaller over the same period.

What happens if I withdraw money?

The remaining balance keeps compounding, but on a smaller base, so the path to the original target takes longer.