Compound Interest Calculator
What is Compound Interest?
Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, compound interest makes your money grow exponentially over time. Albert Einstein reportedly called it the "eighth wonder of the world."
Our Compound Interest Calculator helps you visualize how your investments grow with the power of compounding.
Compound Interest Formula
The compound interest formula is: A = P(1 + r/n)^(nt)
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- n = Number of times interest compounds per year
- t = Time in years
How Does Compound Interest Work?
Let's say you invest $10,000 at 8% annual interest:
- Year 1: $10,000 × 1.08 = $10,800 (earned $800)
- Year 2: $10,800 × 1.08 = $11,664 (earned $864)
- Year 3: $11,664 × 1.08 = $12,597 (earned $933)
Notice how each year you earn more interest because you're earning interest on your interest!
Simple Interest vs Compound Interest
With simple interest, you only earn interest on your principal. With compound interest, you earn interest on both principal and accumulated interest.
Example: $10,000 at 8% for 20 years:
- Simple Interest: $10,000 + ($800 × 20) = $26,000
- Compound Interest: $10,000 × (1.08)^20 = $46,610
Compound interest earned $20,610 more!
Compounding Frequency Explained
- Annual: Interest compounds once per year
- Semi-Annual: Interest compounds twice per year
- Quarterly: Interest compounds 4 times per year
- Monthly: Interest compounds 12 times per year
- Daily: Interest compounds 365 times per year
More frequent compounding = slightly higher returns. Monthly compounding is common for most investments.
The Rule of 72
A quick way to estimate how long it takes to double your money: divide 72 by the interest rate.
- At 6%: 72 ÷ 6 = 12 years to double
- At 8%: 72 ÷ 8 = 9 years to double
- At 12%: 72 ÷ 12 = 6 years to double
Combine Compounding with Regular Investments
Compound interest becomes even more powerful when you add regular investments. Check out our SIP Calculator to see how monthly investments grow, or use the Monthly Investment Calculator for detailed projections.
Frequently Asked Questions
What is a good compound interest rate?
It depends on the investment type. Savings accounts offer 3-5%, bonds 5-7%, and stock market historically returns 8-12% annually.
How often should interest compound?
More frequent is better. Monthly or daily compounding yields slightly higher returns than annual compounding.
Is compound interest always better?
For investments, yes. For loans, no - compound interest on debt means you pay more over time.