Compound Interest Calculator
Calculate compound interest on savings and investments over time.
What Is the Compound Interest Calculator?
The compound interest calculator shows how your money grows when interest is earned not only on the initial principal but also on accumulated interest from previous periods. This 'interest on interest' effect makes compound interest a powerful tool for building wealth over time.
Formula
How to Use
Enter the initial investment (principal), the annual interest rate as a percentage, the number of years, and how often interest is compounded. Click Calculate to see the final amount and total interest earned.
Example Calculation
Investing $10,000 at 5% annual interest compounded monthly for 10 years: A = 10000(1 + 0.05/12)^(120) = $16,470.09. Total interest earned: $6,470.09.
Understanding Compound Interest
Compound interest is often called the eighth wonder of the world. It is the mechanism behind savings account growth, investment returns, and unfortunately, growing debt.
The key insight is that each compounding period, interest is calculated on the new, larger balance — not just the original deposit. Over time, this creates exponential growth that can dramatically increase wealth.
The compounding frequency matters. Monthly compounding earns slightly more than annual compounding because interest starts earning interest sooner. Daily compounding earns even more, though the marginal benefit decreases with each step.
Understanding compound interest is essential for making informed financial decisions about savings accounts, certificates of deposit, mortgages, credit cards, and investments. This calculator lets you model different scenarios to plan your financial future.
Frequently Asked Questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus any accumulated interest. Over time, compound interest grows much faster.
How does compounding frequency affect returns?
More frequent compounding produces slightly higher returns. Daily compounding earns more than monthly, which earns more than annually. However, the differences become smaller as frequency increases.
What is the Rule of 72?
The Rule of 72 estimates how long it takes to double your money: divide 72 by the annual interest rate. At 6%, money doubles in about 12 years.