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Compounding works with savings or investments, but it takes time and patience to reap the rewards. Let’s explore compound interest in more detail. What you'll learn:
How does compound interest work?
How to calculate compound interest
Compound interest is where you earn interest on interest you've earned previously, as well as the money you've invested.
The longer you stay invested, the more you can earn.
This simple concept has long been seen as one of the foundations of building wealth. Compound interest differs from simple interest, which is what you earn on only the money you first put in.
Compound interest works by adding your returns to your principal.
For example, imagine you own shares in a company. The company pays you a dividend. If you reinvest that dividend, you buy more shares.
If the company pays dividends the next year, you earn returns on those extra shares too. Your earnings start to generate more earnings.
Explore: How to invest in stocks and shares
If you want to learn how to work out compound interest, you could use a daily compound interest calculator to do the work for you. Or you can use a compound interest formula like this to understand the steps:
Let’s say you put AED 100,000 into a 10-year investment. It has an annual return of 6% and interest is paid monthly.
To work out the compound interest, you start with your principal (AED 100,000). You then follow the formula steps to multiply your investment by the interest rate over time.
In this example, your AED 100,000 grows to AED 181,939 after 10 years with compound interest. The extra AED 21,939 is the difference between simple interest and compound interest. This extra growth is what makes compounding so powerful.
Compounding can also happen daily. Interest is calculated and added to your balance 365 times a year.
Using the same AED 100,000 investment over 10 years, you can calculate daily compound interest like this:
Using the above formula, your investment grows to AED 182,203. As you can see, the more frequently interest is compounded, the more your money works for you.
| Type of interest | Principal (P) | Interest earned | Total (A) |
|---|---|---|---|
| Simple interest | AED 100,000 | AED 60,000 | AED 160,000 |
| Compound interest | AED 100,000 | AED 81,939 | AED 181,939 |
| Daily compound interest | AED 100,000 | AED 82,203 | AED 182,203 |
| Type of interest | Simple interest | Simple interest |
|---|---|---|
| Principal (P) | AED 100,000 | AED 100,000 |
| Interest earned | AED 60,000 | AED 60,000 |
| Total (A) | AED 160,000 | AED 160,000 |
| Type of interest | Compound interest | Compound interest |
| Principal (P) | AED 100,000 | AED 100,000 |
| Interest earned | AED 81,939 | AED 81,939 |
| Total (A) | AED 181,939 | AED 181,939 |
| Type of interest | Daily compound interest | Daily compound interest |
| Principal (P) | AED 100,000 | AED 100,000 |
| Interest earned | AED 82,203 | AED 82,203 |
| Total (A) | AED 182,203 | AED 182,203 |
Compound interest helps your money grow, whether you use a savings account or invest in other options. The way of compounding can vary according to which one you use.
You can open a savings account that pays interest. The interest is compounded daily or monthly. This helps your savings grow steadily. Savings accounts are seen as a low-risk and simple way to use the power of compounding.
Explore: Compound interest for savings
Compounding works for investments like shares, mutual funds or bonds if you reinvest your earnings. The new shares you buy will create their own earnings. This often needs more management than a savings account.
The HSBC Affluent Investor Snapshot 2025 found that affluent investors are prioritising early investment and diversification over speculation. The survey found that younger investors are showing more confidence in their wealth and investment decisions.
Start early on your investment journey to help you accumulate wealth rapidly and make a difference later in life.” - Willem Sels, Global Chief Investment Officer, HSBC Private Bank and Premier Wealth
| Pros | Cons |
|---|---|
| Passive wealth growth over time. | It can work against you if you have debt. |
| The longer you stay invested, the more you can earn. | You need patience to see the long-term benefits. |
| Works for both investments and savings. | Investment returns depend on constant reinvestment. |
| Pros | Passive wealth growth over time. | Passive wealth growth over time. |
|---|---|---|
| Cons | It can work against you if you have debt. | It can work against you if you have debt. |
| Pros | The longer you stay invested, the more you can earn. | The longer you stay invested, the more you can earn. |
| Cons | You need patience to see the long-term benefits. | You need patience to see the long-term benefits. |
| Pros | Works for both investments and savings. | Works for both investments and savings. |
| Cons | Investment returns depend on constant reinvestment. | Investment returns depend on constant reinvestment. |
Harnessing the power of compound interest helps you build wealth slowly and steadily.
Here’s what to remember: Simple interest is what you get on your starting amount only. Compound interest is what you earn on your principal plus the interest you build up over time.
You can use a compound interest formula to check how much you can earn.
The most important thing is to start early. The longer your money stays invested, and your returns are reinvested, the better the results can be.
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