Compound Interest Calculator
The Power of Compounding
Compound interest is often called the "eighth wonder of the world." Your money earns interest, and then that interest earns more interest, creating exponential growth over time.
Understanding Compound Interest
Simple vs Compound Interest
Simple Interest
Interest is calculated only on the principal amount.
A = P(1 + rt)
$10,000 at 7% for 10 years = $17,000
Compound Interest
Interest is calculated on principal + accumulated interest.
A = P(1 + r/n)^(nt)
$10,000 at 7% for 10 years = $19,672
The Compound Interest Formula
A = P(1 + r/n)nt
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (as decimal)
- n = Number of times interest compounds per year
- t = Time in years
Compounding Frequency Matters
More frequent compounding results in higher returns, though the difference diminishes as frequency increases:
| Frequency | Times/Year | $10,000 at 10% for 10 years |
|---|---|---|
| Annually | 1 | $25,937 |
| Quarterly | 4 | $26,851 |
| Monthly | 12 | $27,070 |
| Daily | 365 | $27,179 |
The Rule of 72
A quick way to estimate how long it takes to double your money:
Years to Double ≈ 72 ÷ Interest Rate
Example: At 8% interest, money doubles in approximately 72 ÷ 8 = 9 years
Why Start Early?
Time is the most powerful factor in compound interest. Here's why starting early matters:
Scenario: $500/month at 7% annual return
- • Start at age 25, stop at 65: $1,199,000 (40 years)
- • Start at age 35, stop at 65: $567,000 (30 years)
- • Start at age 45, stop at 65: $246,000 (20 years)
Starting 10 years earlier more than doubles the final amount!
Real-World Applications
- Retirement accounts (401k, IRA) - Long-term compound growth
- Savings accounts - Interest compounds (usually daily or monthly)
- Bonds - Interest payments can be reinvested
- Dividend stocks - Reinvested dividends compound returns
- Debt - Credit card interest also compounds (work against you!)
Frequently Asked Questions
What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest which only earns on the principal, compound interest allows your money to grow exponentially over time as you earn 'interest on interest.'
How often should interest compound for the best returns?
More frequent compounding results in higher returns. Daily compounding earns more than monthly, which earns more than quarterly or annually. However, the difference becomes smaller as frequency increases. The biggest jump is from annual to quarterly compounding.
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 your annual interest rate to get the approximate number of years. For example, at 8% interest, your money doubles in about 72 / 8 = 9 years.
Why should I start investing early?
Time is the most powerful factor in compound interest. Starting early gives your money more time to compound and grow exponentially. Someone who starts investing at 25 with $500/month at 7% return will have over twice as much at 65 compared to someone who starts at 35 with the same contributions.