Compound Interest Calculator
Calculate how your investments grow over time with compound interest. See how compounding frequency affects your returns.
How could this calculator be better?
We're always looking to improve our tools. Here are some ideas we're considering:
- Add option for regular contributions/deposits
- Include inflation adjustment to show real returns
- Add graphical visualization of growth over time
- Include tax implications for interest earnings
- Add comparison between different compounding frequencies
Email us at yoursmartcalculator@gmail.com with your suggestions!
Quick Facts
- •Compound interest is often called the "eighth wonder of the world"
- •At 7% interest, money doubles approximately every 10 years (Rule of 72)
- •Daily compounding yields slightly more than monthly compounding
- •Starting early has a dramatic effect due to compounding over time
- •The effective annual rate (APY) is higher than the nominal rate (APR)
Understanding Compound Interest
How Compound Interest Works
Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. This creates a snowball effect where your money grows at an accelerating rate over time.
Unlike simple interest which only earns returns on your original amount, compound interest earns returns on your returns, leading to exponential growth.
The Compound Interest Formula
The formula for compound interest is:
A = P(1 + r/n)nt
- A = the future value of the investment/loan
- P = principal investment amount
- r = annual interest rate (decimal)
- n = number of times interest is compounded per year
- t = time the money is invested for, in years
The Power of Compounding Frequency
The more frequently interest is compounded, the greater your returns will be. For example, $10,000 at 5% interest for 10 years:
- Compounded annually: $16,288.95
- Compounded monthly: $16,470.09
- Compounded daily: $16,486.65
While the differences may seem small in the short term, over decades they can amount to significant sums.
The Rule of 72
A quick way to estimate how long it will take for your money to double:
Years to double = 72 ÷ interest rate
For example, at 6% interest, your money will double in about 12 years (72 ÷ 6 = 12).
Frequently Asked Questions
What's the difference between APR and APY?
APR (Annual Percentage Rate) is the simple interest rate without compounding, while APY (Annual Percentage Yield) includes the effect of compounding. APY gives you a more accurate picture of your actual return.
How does starting early affect compound interest?
Starting early gives your money more time to grow exponentially. Even small amounts invested early can surpass larger amounts invested later due to the power of compounding over time.
What's better: higher interest rate or more frequent compounding?
Generally, a higher interest rate will have a bigger impact than more frequent compounding. However, the best option is both a high rate and frequent compounding.
How can I maximize my compound interest earnings?
To maximize compound interest: 1) Start as early as possible, 2) Find accounts with higher interest rates, 3) Choose accounts with more frequent compounding, and 4) Add to your principal regularly.
Does compound interest work for debt too?
Yes, compound interest works against you with debt. Credit cards and loans use compounding to calculate interest owed, which is why paying off debt quickly is so important.