How to Calculate Compound Interest
Our compound interest calculator shows how your money grows over time when interest earns interest. Understand the power of compounding for savings, investments, and retirement planning.
Understanding Compound Interest
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (calculated only on principal), compound interest grows exponentially. Albert Einstein reportedly called it "the eighth wonder of the world."
Compound Interest Formula
A = P(1 + r/n)^(nt), where A = final amount, P = principal, r = annual interest rate, n = compounding frequency per year, t = time in years.
Example:
$10,000 at 7% compounded monthly for 10 years: A = 10000(1 + 0.07/12)^(12×10) = $20,096.61. You earned $10,096.61 in interest.
Common Use Cases
Real-world applications for this calculator
Retirement Savings
Project how your 401(k) or IRA will grow over decades with compound returns.
Investment Growth
Compare different investment scenarios with various rates and time horizons.
Savings Goals
Calculate how much to save monthly to reach a financial goal.
Tips
- Start early: time is the most powerful factor in compound growth.
- Use the Rule of 72: divide 72 by your interest rate to estimate doubling time.
- Regular contributions amplify compounding effects significantly.
- Even small differences in rates matter greatly over long periods.
Frequently Asked Questions
What is compound interest?
Compound interest is interest earned on both your original deposit and on interest that has already been added to your account. Your money grows faster because you earn "interest on interest."
How often should interest compound?
More frequent compounding means faster growth. Daily compounding grows faster than monthly, which grows faster than annual. However, the difference is often small-a 5% rate compounded daily vs annually differs by only about 0.13% per year.
What is the Rule of 72?
The Rule of 72 estimates how long it takes to double your money: divide 72 by the interest rate. At 6%, your money doubles in about 72÷6 = 12 years. At 8%, it doubles in about 9 years.
How do regular contributions affect compound growth?
Regular contributions dramatically accelerate wealth building. Adding $200/month to a $10,000 initial investment at 7% for 20 years grows to about $143,000-more than double the $64,000 you contributed.
What is the difference between APR and APY?
APR is the annual rate without compounding. APY (Annual Percentage Yield) includes compounding effects. A 5% APR compounded monthly equals about 5.12% APY. APY shows your true annual return.