Compound Interest Calculator
Calculate how your investments grow with compound interest. See the power of compounding over time with different frequencies.
Compound Interest Formulas
Future Value
Compound Interest
Continuous Compounding
Rule of 72
Compounding Frequency
Understanding Compound Interest
Compound interest is often called the 'eighth wonder of the world' because of its remarkable ability to grow wealth over time. Unlike simple interest, which only earns interest on the original principal, compound interest earns interest on both the principal and previously accumulated interest.
This calculator helps you visualize how your investments can grow through the power of compounding. Whether you're planning for retirement, saving for a major purchase, or just curious about investment growth, understanding compound interest is essential for financial planning.
Exponential Growth
Watch your money grow faster as interest compounds on interest.
Time Is Key
The longer your money compounds, the greater the effect.
Frequency Matters
More frequent compounding leads to higher returns.
Regular Contributions
Adding money regularly supercharges your growth.
How Compound Interest Works
When you invest money that earns compound interest, your earnings are periodically added to your principal. In the next period, you earn interest on this larger amount. This creates a snowball effect where your money grows increasingly faster over time.
The Compounding Process
You invest $10,000 at 7% annual interest. At year end, you have $10,700 ($10,000 + $700 interest).
Interest is calculated on $10,700, not $10,000. You earn $749, bringing total to $11,449.
Your $10,000 has grown to $19,672—nearly double—with $9,672 in compound interest earned.
That same $10,000 becomes $76,123—the magic of long-term compounding in action.
Compounding Frequency Comparison
The frequency of compounding affects your final return. More frequent compounding means interest is added to principal more often, resulting in more 'interest on interest.'
| Frequency | Times/Year | $10,000 After 10 Years @7% | Total Interest |
|---|---|---|---|
| Annually | 1 | $19,671.51 | $9,671.51 |
| Semi-Annually | 2 | $19,897.89 | $9,897.89 |
| Quarterly | 4 | $20,015.97 | $10,015.97 |
| Monthly | 12 | $20,096.61 | $10,096.61 |
| Daily | 365 | $20,137.27 | $10,137.27 |
| Continuous | ∞ | $20,137.53 | $10,137.53 |
The Rule of 72
The Rule of 72 is a simple way to estimate how long it takes for your investment to double at a given interest rate. Simply divide 72 by your annual interest rate to get the approximate number of years.
Quick Examples
At 6% interest, your money doubles in about 12 years (72÷6=12). At 8%, it doubles in about 9 years. At 12%, just 6 years.
Why It Matters
Understanding doubling time helps you set realistic expectations. If you have 30 years until retirement and earn 7.2%, your money can double about 4 times (that's 16x growth!).
Limitations
The Rule of 72 is an approximation that works best for interest rates between 6% and 10%. For very high or low rates, it becomes less accurate.
Maximizing Compound Interest
Several strategies can help you maximize the benefits of compound interest for your financial goals.
Start Early
Time is the most powerful factor in compound growth. Someone who invests $5,000/year from age 25-35 (10 years, $50,000 total) will have more at 65 than someone who invests $5,000/year from 35-65 (30 years, $150,000 total) at the same rate.
Invest Regularly
Regular contributions dramatically boost compound growth. $100/month at 7% grows to $121,000 in 30 years. Without contributions, a $36,000 lump sum grows to only $274,000.
Reinvest Dividends
If investing in stocks or funds, reinvesting dividends instead of taking them as cash means more shares that can themselves earn dividends—compounding in action.
Minimize Fees
Investment fees reduce your effective return, which compounds negatively over time. A 1% annual fee on a $100,000 portfolio costs over $30,000 over 20 years compared to a 0.2% fee option.
Use Tax-Advantaged Accounts
401(k)s, IRAs, and Roth accounts let your investments compound without annual tax drag. Tax-deferred compounding can add decades' worth of extra growth.
Compound Interest in Different Contexts
Compound interest applies to many financial situations beyond traditional savings accounts.
Stock Market
Historically, the S&P 500 has returned about 10% annually. With compounding, $10,000 invested in 1980 would be worth over $500,000 today—demonstrating the power of long-term equity investing.
Savings Accounts
While interest rates are lower, high-yield savings accounts still benefit from compounding. They're ideal for emergency funds where safety matters more than maximum returns.
Credit Card Debt
Compound interest works against you with debt. A $5,000 credit card balance at 20% APR, paying only minimums, takes 25+ years to pay off and costs over $9,000 in interest.
Mortgages
Mortgage interest compounds, which is why paying extra toward principal early in the loan has such a large impact—it reduces the base on which future interest is calculated.
Frequently Asked Questions
What's the difference between compound and simple interest?
Simple interest is calculated only on the original principal: $10,000 at 5% for 10 years = $15,000. Compound interest is calculated on principal plus accumulated interest: the same investment with annual compounding = $16,289. The difference grows dramatically over longer periods and with higher rates.
How often should my investment compound?
More frequent compounding is always better (assuming the same stated rate). Daily compounding is better than monthly, which is better than quarterly. However, the difference becomes smaller as frequency increases—continuous compounding isn't much better than daily. Focus more on the rate and time than compounding frequency.
Does compound interest apply to stocks?
Stocks don't technically pay compound interest, but the concept applies through capital appreciation and dividend reinvestment. When you reinvest dividends to buy more shares, those shares earn dividends too—creating a compounding effect. The 'magic' of long-term stock investing is really compound growth.
What's the effective annual rate (EAR)?
The EAR is the actual annual return after accounting for compounding frequency. A 12% rate compounded monthly has an EAR of 12.68%. This lets you compare investments with different stated rates and compounding frequencies on an apples-to-apples basis.
How can I calculate compound interest in Excel?
Use the FV (Future Value) function: =FV(rate/periods, periods*years, -payment, -principal). For example, $10,000 at 6% for 10 years with monthly compounding: =FV(0.06/12, 12*10, 0, -10000) returns $18,193.97.
What is continuous compounding?
Continuous compounding is the theoretical limit of compounding frequency—interest is calculated and added to principal infinitely often. The formula uses Euler's number (e ≈ 2.71828): A = P × e^(rt). In practice, daily compounding is nearly identical to continuous.
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