Compound Interest Calculator
Calculate compound interest on savings or investments. See how your money grows over time with monthly or yearly compounding.
How Compound Interest Works
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. The formula is: A = P(1 + r/n)^(nt), where:
- A = final amount
- P = principal (initial investment)
- r = annual interest rate (decimal)
- n = number of times interest compounds per year
- t = number of years
Albert Einstein reportedly called compound interest the eighth wonder of the world. The key insight is that your earnings generate their own earnings over time, creating exponential growth.
The Power of Starting Early
Time is the most powerful factor in compound interest. Consider two investors:
- Investor A invests $5,000/year from age 25 to 35 (10 years, $50,000 total)
- Investor B invests $5,000/year from age 35 to 65 (30 years, $150,000 total)
At 7% annual return, Investor A ends up with approximately $602,000 at age 65, while Investor B has approximately $540,000 — despite investing three times less money. This is the power of starting early.
Frequently Asked Questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal plus any previously earned interest. Over time, compound interest grows much faster.
How often should interest compound?
The more frequently interest compounds, the more you earn. Daily compounding yields slightly more than monthly, which yields more than annually. However, the differences become smaller as compounding frequency increases.
What is the Rule of 72?
The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by the annual interest rate. At 6% interest, your money doubles in approximately 72/6 = 12 years.