Compound Interest Calculator
See the power of compound interest. Adjust your principal, monthly contributions, and interest rate to forecast your growth.
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Understanding Compound Interest
Compound interest is often called the "eighth wonder of the world" - and for good reason. It's the mechanism by which your money grows exponentially rather than linearly over time.
Simple Interest vs Compound Interest:
- Simple Interest: You earn interest only on your initial principal. $1,000 at 10% = $100/year forever.
- Compound Interest: You earn interest on your principal PLUS all accumulated interest. $1,000 at 10% = $100 year 1, $110 year 2, $121 year 3, etc.
💰 Example: $10,000 invested at 8% annually for 30 years:
Simple Interest: $34,000 total ($10K principal + $24K interest)
Compound Interest: $100,627 total ($10K principal + $90K interest!)
Difference: $66,627 - that's the power of compounding.
The Compound Interest Formula
The standard formula for compound interest is:
A = P(1 + r/n)^(nt) Where:
- A = Final amount (what you'll have)
- P = Principal (initial investment)
- r = Annual interest rate (as decimal, so 7% = 0.07)
- n = Number of times interest compounds per year
- t = Number of years
With regular contributions, the formula becomes:
A = P(1 + r/n)^(nt) + PMT × (((1 + r/n)^(nt) - 1) / (r/n)) Where PMT = regular monthly payment
Compounding Frequency Matters
How often interest compounds affects your final balance:
| Frequency | Times/Year | $10K @ 8% for 30 Years |
|---|---|---|
| Annually | 1 | $100,627 |
| Quarterly | 4 | $107,184 |
| Monthly | 12 | $109,357 |
| Daily | 365 | $110,496 |
Daily compounding adds ~$10K vs annual compounding over 30 years - a meaningful difference!
Rule of 72: Quick Doubling Time
The Rule of 72 is a simple way to estimate how long it takes to double your money:
Years to Double = 72 ÷ Interest Rate
- At 6% annual return: 72 ÷ 6 = 12 years to double
- At 8% annual return: 72 ÷ 8 = 9 years to double
- At 10% annual return: 72 ÷ 10 = 7.2 years to double
- At 12% annual return: 72 ÷ 12 = 6 years to double
Real-World Applications
🏦 Retirement Savings
Starting young makes a massive difference. $500/month from age 25-65 at 8% = $1.7M. Start at 35 = $745K. That's a $955K difference for just 10 extra years!
🎓 Education Funds
College costs rise ~5% annually. $200/month invested at 7% from birth = $86K by age 18. Without investing, saving $200/month only yields $43K.
💳 Credit Card Debt
Compound interest works against you too! $5K in credit card debt at 18% APR compounds monthly. Minimum payments = 15+ years to pay off and $4K+ in interest.
🏠 Down Payment Savings
Saving $1,000/month for 5 years in a high-yield savings account (4.5%) = $66,877 vs $60K if kept in checking. That's $6,877 free money.
Frequently Asked Questions
What is compound interest? ▼
Compound interest is interest calculated on both the initial principal AND all accumulated interest from previous periods. Unlike simple interest (which only earns on principal), compound interest grows exponentially because you're earning "interest on your interest." This creates a snowball effect over time.
How often should interest compound for best results? ▼
More frequent compounding yields higher returns: Daily > Monthly > Quarterly > Annually. However, the practical difference is usually small (1-3%) unless you're dealing with very large sums or very long time periods. Most savings accounts compound daily or monthly.
What's a realistic interest rate to use? ▼
It depends on investment type: Stock market historical average is ~10% annually (but fluctuates). High-yield savings accounts offer 4-5%. CDs provide 2-5% depending on term. Government bonds yield 3-4%. For long-term planning (retirement), 7-8% is a conservative estimate accounting for inflation.
How much difference do regular monthly contributions make? ▼
Huge difference! Example: $10K initial investment at 8% for 30 years = $100K. Add $200/month contributions = $324K final balance. Regular contributions can triple your outcome, especially over long periods. This is why consistent 401(k) contributions are so powerful.
Is compound interest growth guaranteed? ▼
Only with fixed-rate instruments like CDs, bonds, or high-yield savings accounts. Stock market investments average 10% historically but fluctuate yearly (some years +30%, others -20%). Use our calculator with different scenarios (optimistic, realistic, pessimistic) to plan for various outcomes.