How savings grow
How paying in regularly, interest and time build a pot, what AER means, and whether your savings beat inflation.
Savings grow from three things working together: the money you pay in, the interest the bank adds, and time. Pay in regularly, leave it alone, and the interest starts earning interest of its own. The longer it runs, the faster the pot grows.
The short version
- A pot is built from what you pay in plus the interest on top. Both add up over time.
- Interest earns interest, so a pot grows faster the longer you leave it. This is compounding.
- Compare accounts on their AER, the annual equivalent rate, so you are comparing like for like.
- If your rate is below inflation, the pot still grows in pounds but buys less than before. Every figure here is an estimate, and returns are not guaranteed.
How a pot builds
Two things go into a savings pot. The first is your own money: a starting amount if you have one, plus anything you pay in along the way. Paying in a fixed sum each month is the steady way most people save, and it is the habit that does most of the heavy lifting early on.
The second is interest, the bank's payment for keeping your money with them. Interest is usually worked out daily on your balance and added to the account either monthly or once a year. The clever part is what happens next: once interest is added, it joins your balance and earns interest itself. Earning interest on your interest is called compounding, and it is what makes a pot grow faster the longer it runs. We go deeper into the maths in how compound interest works.
A worked example
Say you pay £200 a month into an account at 4% AER and leave it for 10 years. Here is how the pot builds, year by year. The figures assume interest is added monthly and rounded for clarity.
| End of year | Paid in so far | Pot value |
|---|---|---|
| 1 | £2,400 | £2,453 |
| 2 | £4,800 | £5,005 |
| 3 | £7,200 | £7,662 |
| 5 | £12,000 | £13,304 |
| 10 | £24,000 | £29,548 |
After 10 years you have put in £24,000 of your own money, and the pot is worth about £29,548. The extra £5,548 is interest. Notice the gap widens over time: in year one the interest is small, but by year 10 the pot is earning interest on a much larger balance, so it pulls away from what you have paid in. These are estimates to show the shape of it; real rates move and returns are not guaranteed.
Why interest and time matter most
The amount you save each month sets the pace, but time is what turns a steady habit into a noticeable pot. Early on, almost all the growth is the money you pay in, because there is little interest to compound yet. As the balance grows, the interest on it grows too, and after several years the interest can add a meaningful slice on its own.
That is why starting earlier usually beats saving more later: an extra few years of compounding does work that no single deposit can. The rate matters as well. A higher rate compounds harder, so even a small difference in the AER adds up over a long run. You can see exactly how much the rate and term move your own figure with the savings calculator.
What AER means
AER stands for the annual equivalent rate. It is the rate you would earn over a full year once compounding is taken into account, written as a single percentage. Banks have to show it so you can compare accounts fairly, even when one pays interest monthly and another pays it once a year.
Here is why it helps. An account paying interest monthly compounds a little each month, so it ends up slightly ahead of one paying the same headline rate just once a year. The AER folds that difference in, so when you line up two accounts on their AER you are comparing like for like. When you are choosing where to save, the AER is the number to look at, not the monthly figure.
Types of savings account
Most UK savings accounts fall into a few groups. The trade-off is usually between getting at your money and getting a higher rate.
| Account type | How it works | Trade-off |
|---|---|---|
| Instant-access | Pay in and withdraw whenever you like; rate is usually variable | Most flexible, usually the lowest rate |
| Fixed-rate bond | Lock a lump sum away for a set term, often one to five years | Usually a higher rate, but the money is tied up |
| Cash ISA | A tax-free savings wrapper; comes in easy-access and fixed versions | Interest is tax-free, within an annual limit |
A cash ISA (individual savings account) is a wrapper rather than a separate kind of account: the interest you earn inside it is tax-free, up to an annual ISA allowance set by the government, which is £20,000 across all your ISAs in the 2026/27 tax year. There are also regular saver accounts, which you pay a set amount into each month for a higher headline rate, though the amount you can add is capped. For most savers the tax-free side only matters once interest tips over the personal savings allowance, which we touch on in the questions below. Tax rules can change, so check the current limits with HMRC.
Whether your savings beat inflation
A growing pot is not the whole story. Inflation is the rate at which prices rise over time, and it quietly eats into what your money can buy. Your balance always goes up when it earns interest, but if prices are rising faster than your savings rate, the money buys less than it used to even though the number is bigger.
For example, £100 at 1% becomes £101 after a year. But if prices rose 5% over the same year, something that cost £100 now costs £105, so your £101 no longer stretches as far. To hold its value, your savings need a rate at or above inflation. Comparing your rate against the current inflation rate is the way to check, and it is worth moving stale savings to a better-paying account from time to time. There is more on this in how inflation affects your money.
If you are saving towards something specific, such as a deposit or a holiday, it can help to work backwards from the target to the monthly amount, which we cover in saving for a goal.
Common questions
- How does savings interest work?
- The bank pays you interest for keeping your money with them. It is usually worked out daily on your balance and added to your account either monthly or once a year. Once interest is added, it earns interest of its own, which is called compounding. The headline figure you compare accounts on is the AER, the annual equivalent rate.
- What does AER mean on a savings account?
- AER stands for annual equivalent rate. It shows the interest you would earn over a full year once compounding is taken into account, so two accounts that pay interest at different times can still be compared fairly. When you are choosing an account, the AER is the number to line up, not the monthly rate.
- How much interest will I earn on my savings?
- It depends on how much you save, the rate, and how long you leave it. As a rough guide, paying £200 a month into an account at 4% AER for 10 years builds about £29,500, of which £24,000 is what you paid in and roughly £5,500 is interest. Change the amount, rate or term in our savings calculator to see your own figure. Rates change and returns are not guaranteed.
- What is a regular saver account?
- A regular saver is an account you pay a set amount into each month, often with a higher headline rate than easy-access accounts but a cap on how much you can add. Because the balance starts small and builds month by month, the cash interest you earn over the year is roughly half what the headline rate on a full lump sum would suggest. Most run for about 12 months.
- Do I pay tax on savings interest?
- Most people do not. The personal savings allowance lets a basic-rate taxpayer earn £1,000 of savings interest tax-free each year, a higher-rate taxpayer £500, and an additional-rate taxpayer nothing. Interest earned inside a cash ISA is tax-free on top of that and does not use up the allowance. Tax rules can change, so check the latest with HMRC.
- Will my savings beat inflation?
- Only if the rate is higher than inflation. Your balance always grows in pounds when it earns interest, but inflation is prices rising over time. If prices rise faster than your savings rate, the money buys less than before even though the number is bigger. To keep pace, you need a rate at or above the inflation rate.
About this article
Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. We checked this article against MoneyHelper and gov.uk. The worked example is computed with the same method as our savings calculator and rounded for clarity. The figures here are estimates to help you plan, not financial advice, and returns are not guaranteed: rates change and how a pot grows depends on the account you choose. Last updated June 2026.