Compound Interest Calculator
Calculate how your investments grow over time with the power of compound interest
What is Compound Interest?
Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. Unlike simple interest, which is calculated only on the principal amount, compound interest allows your investments to grow exponentially over time.
How Does Compound Interest Work?
When you invest money, you earn interest on your principal. With compound interest, you also earn interest on the interest you've already earned. This creates a snowball effect where your money grows faster over time. The frequency of compounding (annually, quarterly, monthly, or daily) affects how quickly your investment grows.
Why Use Compound Interest?
- Wealth Building: Compound interest is one of the most powerful tools for building long-term wealth
- Retirement Planning: Helps you understand how your retirement savings will grow over decades
- Investment Decisions: Compare different investment options based on their compound growth potential
- Debt Understanding: See how compound interest affects loans and credit card debt
- Financial Planning: Set realistic financial goals based on projected investment growth
The Compound Interest Formula
The formula for calculating compound interest is: A = P(1 + r/n)^(nt)
- A: Final amount after compound interest
- P: Principal amount (initial investment)
- r: Annual interest rate (in decimal form)
- n: Number of times interest is compounded per year
- t: Time period in years
Tips for Maximizing Compound Interest
- Start Early: The earlier you start investing, the more time compound interest has to work
- Invest Regularly: Consistent investments increase the compounding effect
- Choose Higher Rates: Look for investments with competitive interest rates
- More Frequent Compounding: Daily or monthly compounding grows faster than annual
- Reinvest Earnings: Keep your interest invested to benefit from compounding
Examples of Compound Interest
If you invest $10,000 at 8% annual interest compounded monthly for 10 years, your investment would grow to approximately $22,196. The same investment at simple interest would only grow to $18,000, showing the power of compounding.