Compound Interest Calculator

How Compound Interest Works

Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. It's often called "interest on interest" and can significantly boost your investment returns over time.

The Compound Interest Formula

A = P(1 + r/n)^(nt)

A = Final amount

P = Principal (initial amount)

r = Annual interest rate (as decimal)

n = Number of times interest is compounded per year

t = Time in years

Practical Examples

Basic Compound Interest

Investment: $1,000 at 5% annual interest, compounded monthly for 10 years

Calculation:

A = $1,000(1 + 0.05/12)^(12×10)

A = $1,000(1.004167)^120

Result: $1,643.62

Interest earned: $643.62

With Regular Contributions

Initial: $1,000 + $100/month at 7% annual interest for 20 years

Breakdown:

Initial $1,000 grows to: $3,870

$24,000 in contributions grows to: $49,729

Total: $53,599

Total interest: $28,599

💡 Tips for Maximizing Compound Interest

🚀 1. Start Early

Time is your greatest ally with compound interest. Starting even a few years earlier can make a dramatic difference in your final returns.

🎯 2. Be Consistent

Regular contributions, even small ones, can significantly boost your returns through the power of compound growth.

🔄 3. Reinvest Returns

Always reinvest your interest and dividends to maximize the compounding effect. Spending returns reduces your compound growth potential.

⏳ 4. Stay Patient

Compound interest works best over long periods. Avoid withdrawing funds early to let the magic of compounding work for you.

Compound Interest Calculator FAQs

What is the difference between simple and compound interest?

Simple interest is only calculated on the principal amount, while compound interest is calculated on the principal plus any previously earned interest. Over time, compound interest can significantly outperform simple interest.

Example with $1,000 at 5% for 10 years:

Simple interest: $1,000 + ($1,000 × 0.05 × 10) = $1,500

Compound interest: $1,000 × (1.05)^10 = $1,628.89

Difference: $128.89 more with compound interest!

How does compounding frequency affect interest rates?

A higher compounding frequency generally results in higher returns. Daily compounding typically yields the best results, followed by monthly, quarterly, and annual compounding.

$1,000 at 6% for 10 years:

Annually: $1,790.85

Monthly: $1,819.40

Daily: $1,822.03

What is the Rule of 72?

The Rule of 72 is a quick way to estimate how long it takes for an investment to double. Simply divide 72 by the annual interest rate to get the approximate number of years.

Examples:

At 6% interest: 72 ÷ 6 = 12 years to double

At 9% interest: 72 ÷ 9 = 8 years to double

At 12% interest: 72 ÷ 12 = 6 years to double

How do regular contributions affect compound interest?

Regular contributions can dramatically increase your final amount because each contribution also earns compound interest over time. The earlier and more frequently you contribute, the greater the impact.