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Compound Interest Calculator

See exactly how your savings and investments will grow over time with the power of compound interest.

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How to Calculate Compound Interest

Compound interest is one of the most powerful concepts in personal finance. Unlike simple interest, which is only calculated on your original deposit, compound interest earns returns on both your principal and your previously accumulated interest. Over long periods of time, this creates an exponential growth curve that Albert Einstein allegedly called "the eighth wonder of the world."

The formula for compound interest is:

A = P(1 + r/n)nt

Where A is the final amount, P is your initial principal (starting deposit), r is the annual interest rate expressed as a decimal, n is the number of times interest compounds per year, and t is the number of years your money is invested.

For example, if you invest $10,000 at a 7% annual rate compounded monthly for 20 years, your investment would grow to approximately $40,387. That means you earned over $30,000 in interest on a $10,000 deposit. Add monthly contributions to the equation and the numbers become even more dramatic.

What Is Compound Interest?

At its core, compound interest means earning interest on your interest. Imagine you deposit $1,000 in a savings account that pays 5% annually. After year one, you have $1,050. In year two, you earn 5% on $1,050 (not just the original $1,000), giving you $1,102.50. Each year, the base amount grows, and your earnings accelerate.

This is why starting early matters so much. An investor who begins at age 25 and contributes $200/month at 7% will have significantly more at retirement than someone who starts at 35 with the exact same contributions. Time is the single most important variable in the compound interest equation.

Compound Interest vs. Simple Interest

Simple interest only calculates returns on the original principal. If you invest $10,000 at 7% simple interest for 20 years, you earn $14,000 in interest for a total of $24,000. With compound interest at the same rate compounded monthly, you end up with over $40,000. The difference is over $16,000, and it only grows wider with longer time horizons.

How Compounding Frequency Affects Your Returns

The more frequently interest compounds, the more you earn. Annual compounding applies interest once a year. Monthly compounding applies it twelve times a year, and daily compounding applies it 365 times. In practice, the difference between daily and monthly compounding is small (often just a few dollars per year on moderate balances), but the jump from annual to monthly compounding is meaningful. Most savings accounts and investment vehicles compound daily or monthly.

Compound Interest Calculator FAQ

What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest which only earns on the original amount, compound interest allows your money to grow exponentially over time. It is a key concept behind long-term investing and savings growth.
How is compound interest calculated?
Compound interest uses the formula A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate as a decimal, n is compounding frequency per year, and t is time in years. Our calculator above handles all of this math for you and also factors in monthly contributions.
What is the difference between APR and APY?
APR (Annual Percentage Rate) is the stated yearly interest rate without accounting for compounding. APY (Annual Percentage Yield) includes the effect of compounding, showing you the actual return you earn in a year. APY is always equal to or higher than APR. When comparing savings accounts or investment products, APY gives you the more accurate picture of your real returns.
How often should interest compound for the best return?
More frequent compounding yields higher returns. Daily compounding earns more than monthly, which earns more than annually. However, the difference between daily and monthly compounding is usually quite small. The biggest improvement comes from moving from annual to monthly compounding. Most modern banks and investment accounts already compound daily or monthly.
How much should I invest to become a millionaire?
It depends on your time horizon and expected return rate. At a 7% annual return compounded monthly, investing $1,000/month would make you a millionaire in about 25 years. Starting with $50,000 and adding $500/month at 8% would get you there in roughly 27 years. Use the calculator above to experiment with your own numbers.