Just like tea and biscuits, compound interest and investing not only go hand in hand, but are a match made in heaven.
The returns you make on returns, compounding is the secret sauce that could help your investments grow further.
Thankfully, you don’t need to be wealthy (or a maths expert) to benefit; by simply being invested in the first place, compounding is something all investors can take advantage of.
In this article, we’ll not only explore the benefits in more detail, but also the misconceptions and considerations around compounding.
Ok, let’s get things started with the basics.
- What is compounding?
- How does compound investing work?
- The benefits of compounding
- How to make compounding work for you
- The latte factor
- Start your investment journey today
What is compounding?
Think of compounding as a financial snowball effect.
When investing, any profits you make are paid out and reinvested year-on-year. Just like a snowball that picks up more snow running down a hill, those reinvested profits make your overall investment pot bigger.
And the bigger your overall investment pot? The bigger your profits become to then reinvest.
But here’s the thing about compounding: it’s not really about how much you invest, but how long you invest for. Because – and as is so often the case with investing – the earlier you get started, the more time you have to reap its rewards.
How does compound investing work?
The easiest way to understand compound interest and investing is with an example using one of our investment plans.
James is a 20-year-old investor who puts £10,000 into a Wealthify Stocks and Shares ISA Original plan with a Confident investment style and leaves it untouched for 10 years without making any additional contributions. What happens to James’ money depends on how the markets perform over that decade. Based on our Stocks and Shares ISA calculator projections:
- If the markets perform worse than expected, James’ £10,000 could grow to £12,493.
- If markets perform in line with expectations, it could reach £17,601.
- And if markets perform better than expected, it could grow to £25,124.
That's a potential gain of anywhere from £2,493 to £15,124 on James’ original investment.
So how does compound investing create this growth?
The magic happens because you're not just earning returns on your original £10,000. You're earning returns on your returns, too.
In the first year, if James’ investment grows, that growth gets added to his pot. In year two, James is earning returns on his original investment plus year one's growth. In year three, he’s earning on the original investment plus growth from years one and two. This snowball effect continues year after year.
Let's say in the expected scenario, James’ investment grows by around 5.8% annually on average to reach that £17,601 figure. In year one, he might earn around £580. But by year ten, that same percentage growth is working on a much larger pot, so James is earning significantly more in pound terms even though the percentage stays similar.
This is why leaving your money invested for longer periods can be powerful. The compounding effect becomes more pronounced as time goes on. It's also why starting to invest earlier, even with smaller amounts, could be more beneficial than waiting and investing larger sums later.
Please note that this is only an example to demonstrate how compounding works based on our Stocks and Shares ISA calculator. It is not a reliable indicator of how much you could end up with if you invest.
These are only forecasts and not a reliable indicator of future performance. With investing, your capital is at risk and you could get back less than you put in.
To avoid confusion and improve your financial knowledge, it’s also worth understanding the different types of interest and growth.
Let’s start with something called simple interest, which doesn’t provide the same snowball effect as compounding. You only ever earn interest on the money you’ve paid in, meaning it’s not quite as beneficial for long-term investing.
With simple interest, James’ 10-year total would have been £15,000; £2,601 less than compound growth investing (although it’s important to remember that compound growth is never guaranteed).
And, just in case it ever crops up as a quiz question, simple interest is an example of linear growth, whereas compound represents exponential growth.
The benefits of compounding
Like we said at the start of this article, compound interest and investing are a match made in heaven — and here are some of the reasons why.
It’s rewarding (in more ways than one)
By now, you know compounding provides potentially higher financial returns than simple interest.
But to enjoy those returns, a long-term strategy and patience is required; easier said than done in a digital-first society driven by instant gratification.
With that in mind, waiting for your investments to potentially snowball not only becomes financially rewarding, but personally rewarding, too.
It’s motivating
The longer you invest, the more time your money has to take advantage of potential compound interest. And what better motivation to start investing earlier in life than that?
It’s effortless
In many ways, compound interest is the equivalent of putting your investment growth on autopilot.
Although those returns are never guaranteed, when you do experience growth, compounding happens automatically, without you ever having to lift a finger!
How to make compounding work for you
The only bigger advantage than knowing how compound interest works? Knowing how to make it work to your own advantage.
And, starting with an analysis of your daily spending habits, here are a few simple ways to help you do so.
The latte factor
Much like compounding itself, this popular concept is also based on the snowball effect. Instead of accumulated interest, however, what matters is the combined total of the small everyday purchases we make.
From unused subscriptions to – yep, you’ve guessed it – takeaway lattes; these things might seem like insignificant amounts on their own. But over the course of weeks, months, and years? Well, they soon add up, with the idea being that this money could be invested instead.
It’s important to emphasise this isn’t about shaming or feeling bad about how we spend our own money; it’s about recognising financial patterns — then having the choice to change them.
As a big fan of takeaway lattes (hazelnut ones, to be specific), I decided to put this concept to the test myself.
A quick banking app search for Starbucks later, turns out I spent £83.50 on them in September 2025 alone.
Over the course of one year, that’s a whopping £1,002!
Now, as someone who doesn’t spend a huge amount of money on going out for food, drinks, or clubbing, takeaway coffee is one of my only treats.
To put things into context, however, we’ll use James’ 5.8% example from earlier.
If I invested that initial £1,002 then added the £83.50 every month for ten years, I could end up with £15,320— £4,298 of which is interest from compounding investing.
These are only forecasts and not a reliable indicator of future performance. With investing, your capital is at risk and you could get back less than you put in.
Little and often wins the race
In other words, compound interest and investing take time, but you don’t need to invest large amounts to enjoy the eventual benefits.
Because it’s generally recommended you invest for a minimum of five years, consistency is the key; that’s why something as simple as setting up a Direct Debit could help you unlock the power of compounding.
And if you want to know how powerful it can be, just ask Warren Buffett; arguably the greatest investor of all time, he accumulated 99% of his fortune after the age of 65! [1]
You’re better late than never
Unlike Buffett, who purchased his first stock aged 11, this content writer didn’t start investing until he was 35.
Do I wish I’d started investing £50 a month in my 20s? Sure.
But that’s the problem with hindsight: it’s a wonderful thing — not always a useful one.
So, instead of dwelling on a financial past I can’t change, I decided to take control of a financial future that I can.
Granted, I’m probably not going to reach billionaire-Buffet's levels of wealth. But when it comes to building numbers, your age really is just a number.
And, in order to enjoy the benefits of compound growth investing, I know I’ve taken the most important step of them all: getting started in the first place.
Start your investment journey today
At Wealthify, everything is managed for you by our team of in-house investment experts, helping you make the most of your time and money.
We offer four different ways to get started:
Flexible Stocks and Shares ISA
A tax-efficient way to invest up to £20,000 each tax year, this is our most popular product. The flexible part means you can withdraw money from your account and re-deposit it within the same tax year — without affecting your annual £20,000 allowance.
General Investment Account (GIA)
A good option if you’ve used your annual ISA allowance but want to carry on investing. Although there’s no limit on how much you can invest in a GIA, it doesn’t come with the same tax benefits as our Stocks and Shares ISA.
Self-Invested Personal Pension (SIPP)
By paying in your own money (with the option to adjust the amount), a SIPP helps you invest specifically for retirement. There’s no capital gains or income tax to pay on investment growth, and you can opt in for a 25% tax relief top-up on personal contributions.
Junior Stocks and Shares ISA (JISA)
This is a great way to save and invest up to £9,000 every year for your child. All interest and gains are tax-free, meaning they get to keep more of their returns once they hit 18, which is when they can access the money.
Depending on your circumstances and needs, you can open as little or as many of our award-winning products as you like.
And because all Wealthify Investment Plans give you exposure to global investment markets, the only thing you need to do to get started is:
- Pick your product(s).
- Choose your investment style (from Cautious to Adventurous) and theme (Original or Ethical).
- Pass a suitability quiz.
- Let us handle the rest!
As you can see, we’ve made everything as simple as possible — which is probably why more than 100,000 busy people trust us to manage their investments for the long term.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
