Compound Interest Calculator
Calculate how your investments grow over time with compound interest
Advertisement
Your Investment Growth Projection
Initial Investment
Interest Earned
Future Value
Yearly Growth Breakdown
| Year | Starting Balance | Interest Earned | Ending Balance | Cumulative Interest |
|---|
Compound Interest: The Eighth Wonder of the World
Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. Often called "interest on interest," it causes wealth to grow exponentially over time, making it a fundamental concept for long-term investing and savings. This powerful effect is why compound interest is favored for retirement accounts, long-term investments, and savings vehicles where money can grow undisturbed for years. Albert Einstein famously called it "the eighth wonder of the world" because of its powerful growth potential.
Compound Interest Formula
A = P(1 + r/n)nt
Where:
- A = Future value of investment
- P = Principal investment amount
- r = Annual interest rate (decimal)
- n = Number of times interest is compounded per year
- t = Time the money is invested for (years)
Power of Compounding
The more frequently interest is compounded, the greater the return. Daily compounding yields slightly more than monthly, which yields more than yearly compounding.
Why Compound Interest Matters
Compound interest can work for or against you, depending on whether you're earning it (investing) or paying it (borrowing):
| Scenario | Impact | Example |
|---|---|---|
| Saving Early | More time for compounding to work | Starting at age 25 vs. 35 can double your retirement savings |
| Higher Rates | Exponential growth difference | 7% vs 5% over 30 years = 2-3x more money |
| Regular Contributions | Dramatically increases final amount | $100/month for 30 years at 7% = $122,000 |
| Credit Card Debt | Works against you equally powerfully | $5,000 at 18% = $7,500 in just 5 years |
Practical Applications
For Saving/Investing
- Retirement accounts (401k, IRA)
- High-yield savings accounts
- Index funds and ETFs
- Certificate of Deposits (CDs)
- Dividend reinvestment plans
For Borrowing
- Credit card balances
- Most personal loans
- Mortgages (partially)
- Student loans
Rule of 72
To estimate how long it takes to double your money: Divide 72 by your interest rate. For example, at 6% interest, money doubles in about 12 years (72 รท 6 = 12).
Compound Interest vs. Simple Interest
| Comparison | Compound Interest | Simple Interest |
|---|---|---|
| Interest Calculation | On principal + accumulated interest | Only on original principal |
| Growth Pattern | Exponential (curve) | Linear (straight line) |
| Best For | Long-term investments (5+ years) | Short-term loans (under 1 year) |
| Total Returns ($1k @5% for 10y) | $1,647.01 (monthly compounding) | $1,500.00 |
Summary for Quick Reference
Compound interest is the powerful financial concept where you earn "interest on interest," leading to exponential growth of your money over time. The compound interest formula A = P(1 + r/n)nt shows how principal (P), interest rate (r), compounding frequency (n), and time (t) work together. Key benefits include accelerated growth for long-term investments, making it ideal for retirement accounts and savings. Use our compound interest calculator to see how your money can grow over time with this powerful effect.
Advertisement