Compound Interest Calculator

Compound interest is often called the eighth wonder of the world, and for good reason. Unlike simple interest, which is calculated only on the original principal, compound interest earns interest on both the initial amount and the accumulated interest from previous periods. This seemingly small difference creates an exponential growth effect that can transform modest savings into substantial wealth over time. Understanding compound interest is fundamental to making informed decisions about savings, investments, and debt management.

How Compound Interest Works

The mechanics of compound interest are straightforward but powerful. When you deposit money into an account that earns compound interest, the interest earned in each period is added to the principal. In the next period, interest is calculated on this new, larger balance. For example, if you invest $10,000 at 5% annual interest compounded yearly, after the first year you earn $500 in interest, bringing your balance to $10,500. In the second year, you earn 5% on $10,500—that's $525, not just $500. By year 30, your original $10,000 has grown to $43,219 without adding a single additional dollar.

The frequency of compounding also matters. Interest can be compounded annually, quarterly, monthly, or even daily. The more frequently interest compounds, the faster your money grows. Monthly compounding yields slightly more than annual compounding because the interest begins earning its own interest sooner. The formula A = P(1 + r/n)^(nt) captures this relationship, where P is the principal, r is the annual rate, n is the number of compounding periods per year, and t is the time in years.

The Power of Regular Contributions

While compound interest alone is powerful, combining it with regular contributions creates truly remarkable results. Dollar-cost averaging—the practice of investing a fixed amount at regular intervals—allows you to benefit from compounding on every contribution. Consider this: investing $500 per month at 7% annual return for 30 years produces approximately $566,000 in total contributions of $180,000. That means compound interest generated over $386,000 in earnings—more than double what you put in.

Starting early is the single most impactful decision you can make. A 25-year-old who invests $300 per month at 7% until age 65 accumulates roughly $720,000. A 35-year-old who invests $600 per month—twice as much—at the same rate until age 65 accumulates only about $567,000. The ten-year head start proves more valuable than doubling the contribution amount, illustrating why time is compound interest's most powerful ally.

The Rule of 72

The Rule of 72 is a simple mental shortcut for estimating how long it takes to double your money with compound interest. Divide 72 by your annual interest rate to get the approximate number of years required for doubling. At 6% annual return, your money doubles in roughly 12 years (72 ÷ 6 = 12). At 9%, it doubles in about 8 years. At 3%, it takes 24 years. This rule works best for rates between 2% and 15% and provides a quick way to compare investment options without pulling out a calculator.

The Rule of 72 also works in reverse to understand the impact of inflation. If inflation averages 3% per year, the purchasing power of your money halves in about 24 years. This underscores why simply saving cash without investing is risky over the long term—your money's real value quietly erodes over time.

Compound Interest and Debt

Compound interest is a double-edged sword. While it can build wealth when you save and invest, it can be devastating when applied to debt. Credit card balances, personal loans, and other high-interest debt compound against you. A $5,000 credit card balance at 20% APR that only receives minimum payments can take over 25 years to pay off and cost more than $9,000 in interest alone. Understanding this flip side of compounding emphasizes the importance of prioritizing high-interest debt repayment alongside saving and investing.

Choosing the Right Compounding Strategy

When evaluating savings accounts, certificates of deposit, or investment vehicles, pay close attention to the Annual Percentage Yield (APY) rather than just the stated interest rate. APY accounts for the effect of compounding and gives you a true picture of annual earnings. A 5% rate compounded monthly yields an APY of approximately 5.12%, while the same rate compounded daily yields about 5.13%. While differences between compounding frequencies are small for a single year, they compound upon each other over decades.

Tax-advantaged accounts such as 401(k)s, IRAs, and their international equivalents allow compound interest to work uninterrupted by annual tax obligations. In a taxable account, you may owe taxes on dividends and interest each year, reducing the amount that continues compounding. In tax-deferred accounts, the full balance compounds until withdrawal, which can result in significantly larger accumulations over 20 to 40 years of investing.

Putting It All Together

The key takeaways for leveraging compound interest are simple: start as early as possible, contribute consistently, reinvest all earnings, minimize fees and taxes, and be patient. Even modest amounts grow dramatically over long periods. Use this calculator to model different scenarios—adjust the initial deposit, monthly contribution, rate of return, and time horizon to see how each variable impacts your future wealth. The results often surprise even experienced investors and serve as a powerful motivator to begin or continue investing.