Compound Interest Calculator
See the power of compound interest and how your money grows exponentially over time. Calculate future value with regular contributions and various compounding frequencies.
Understanding Compound Interest
What is Compound Interest?
Compound interest is "interest on interest" - you earn returns not just on your initial investment, but also on the accumulated interest from previous periods. This creates exponential growth over time.
The Formula: A = P(1 + r/n)^(nt)
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate
- n = Compound frequency per year
- t = Time in years
The Power of Time
Time is your greatest asset when it comes to compound interest. Starting early makes a dramatic difference:
| Starting Age | Monthly Savings | Value at 65 |
|---|---|---|
| 25 | $200 | $525,000 |
| 35 | $200 | $244,000 |
| 45 | $200 | $99,000 |
*Assumes 7% annual return
Compound Frequency Impact
More frequent compounding leads to higher returns:
- Daily: Interest calculated 365 times per year
- Monthly: Common for savings accounts
- Quarterly: Typical for some bonds
- Annually: Simple but less effective
The difference becomes more significant with higher rates and longer periods.
Rule of 72
A quick way to estimate how long it takes to double your money:
Years to Double = 72 ÷ Interest Rate
- At 6%: 72 ÷ 6 = 12 years
- At 8%: 72 ÷ 8 = 9 years
- At 10%: 72 ÷ 10 = 7.2 years
This rule provides a good approximation for rates between 6% and 10%.
Maximizing Compound Interest
1. Start Early
Even small amounts invested early can grow to substantial sums. Time is more valuable than the amount.
2. Regular Contributions
Consistent monthly deposits accelerate growth through dollar-cost averaging and compound effect.
3. Reinvest Earnings
Always reinvest dividends and interest rather than withdrawing them to maximize compounding.
4. Tax-Advantaged Accounts
Use 401(k), IRA, or Roth accounts to avoid taxes eating into your compound growth.
Frequently Asked Questions
What's the difference between simple and compound interest?
Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest. Compound interest grows exponentially, simple interest grows linearly.
How much difference does compound frequency make?
For a $10,000 investment at 5% for 20 years: Annual compounding yields $26,533, while daily compounding yields $27,181 - a difference of $648 or 2.4% more.
Should I consider inflation in my calculations?
Yes. If your investment earns 7% but inflation is 3%, your real return is only 4%. Use our calculator's inflation adjustment to see purchasing power.
What are realistic return expectations?
Historical averages: Stock market 10%, Bonds 5%, Savings accounts 0.5-2%. Be conservative in projections and remember past performance doesn't guarantee future results.