Compound Interest Calculator
Discover how your money can grow over time with the power of compounding
Understanding Compound Interest
Compound interest is often called the “eighth wonder of the world” for its ability to exponentially grow wealth over time. Unlike simple interest, which only calculates earnings on your initial investment, compound interest calculates earnings on both your initial amount and the accumulated interest from previous periods.
How Compound Interest Works
When you invest money, you earn interest on your principal amount. With compound interest, that earned interest is added to your principal, and in the next period, you earn interest on this new, larger amount. This creates a snowball effect where your money grows faster over time.
The formula for compound interest is: A = P(1 + r/n)^(nt), where:
- A = the future value of the investment
- P = the principal investment amount
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per year
- t = the number of years the money is invested
Why Compound Interest is Powerful
The real power of compound interest reveals itself over long periods. Even with modest returns, consistent investing over decades can lead to substantial wealth accumulation. This is why financial experts emphasize starting to invest early – time is the most critical factor in the compound interest equation.
Frequently Asked Questions
Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal amount plus any accumulated interest. This means with compound interest, you earn “interest on interest,” leading to exponential growth over time.
The more frequently interest is compounded, the greater the returns. Daily compounding will yield slightly more than monthly compounding, which yields more than annual compounding. However, the difference becomes more significant over longer time periods and with higher interest rates.
Yes, when you have debt with compound interest, such as credit card debt, the interest compounds on what you owe, making the debt grow faster. This is why high-interest debt should be prioritized for repayment.
To maximize compound interest: start investing early, contribute consistently, reinvest your earnings, choose investments with competitive returns, and allow your investments to grow over long time horizons without unnecessary withdrawals.
Compound interest applies to savings accounts, certificates of deposit, bonds, and any investment where earnings are reinvested. For stocks, the concept is similar through dividend reinvestment and capital appreciation, though stock returns are not guaranteed like interest rates.