What is Compound Interest?
Compound interest is when you earn interest not just on your original deposit, but also on the interest you've already earned. It's basically interest earning interest—and it's the reason why investing early matters so much.
Here's the difference: with simple interest, you only earn on your original amount. With compound interest, each year's interest gets added to your balance, and next year you earn interest on that bigger number. Over 20-30 years, this snowball effect can turn modest savings into serious money.
Snowball Effect
Growth accelerates over time—year 20 adds way more than year 2
Works Both Ways
Great for savings, but credit card debt compounds against you
How 401ks Grow
This is exactly how retirement accounts build wealth over decades
Time Matters Most
A 10-year head start beats a higher contribution rate
You'll run into compound interest when:
- Retirement accounts — 401k, IRA, Roth IRA
- Savings accounts — especially high-yield ones (4-5% APY in 2024)
- Index funds & ETFs — when you reinvest dividends
- Debt — credit cards, mortgages, student loans (works against you here)
How to Use This Calculator
It's pretty straightforward. Fill in a few numbers and see how your money grows. Here's what each field does:
Enter Your Starting Amount
How much do you have right now, or how much are you starting with? This could be $1,000 or $100,000 — whatever you're working with.
Tip: Pick your currency at the top if you're not using USD.
Set the Interest Rate
What rate are you expecting? High-yield savings is around 4-5%, stock market averages about 7-10% historically.
Tip: Not sure? Try 7% for long-term stock investments or 4-5% for savings accounts.
Pick Compounding Frequency
How often does interest get added? Most savings accounts compound daily or monthly. Investments typically compound yearly.
Tip: Daily vs monthly makes a small difference. Yearly vs monthly matters more.
Set Your Timeframe
How long are you planning to invest? 5 years? 20 years? The longer the better with compound interest.
Tip: Play with different timeframes. You'll see why people say 'start early.'
Add Regular Deposits (Optional)
Planning to add money monthly or yearly? Set it up here. You can also model withdrawals if you're planning income.
Tip: Even $100/month adds up significantly over 20+ years.
Hit Calculate
See your final amount, how much came from interest vs contributions, and a full breakdown by year or month.
Tip: Try the inflation slider to see what your money will actually buy in future dollars.
What You Get
Charts: Visual breakdown of principal vs interest earned
Year-by-Year Table: See exactly how much you have each year
Inflation Adjusted: What your money will actually buy
Time to Double: Based on the Rule of 72
Multiple Currencies: USD, EUR, GBP, INR, JPY
Save/Reset: Save your scenarios or start over
Compound Interest Formula
The standard compound interest formula is used to calculate the future value of an investment or loan:
Where:
The total amount after interest (principal + interest earned)
The initial amount of money invested or borrowed
The yearly interest rate in decimal form (e.g., 8% = 0.08)
Number of times interest is compounded per year (12 = monthly, 4 = quarterly, 1 = yearly)
The number of years the money is invested or borrowed
To Calculate Only the Interest Earned:
Or simply: (Final Amount minus Principal)
Continuous Compounding Formula
When interest compounds continuously (infinite compounding frequency), the formula becomes:
Where is Euler's number (approximately 2.71828). This represents the mathematical limit of compound interest and is used in advanced financial calculations.
Step-by-Step Calculation Examples
Let's walk through real examples to understand how compound interest calculations work in practice.
Example 1: Basic Compound Interest (Annual Compounding)
Problem: You invest $10,000 at 8% annual interest, compounded yearly for 5 years. How much will you have?
Given:
- Principal (P) =
- Annual Rate (r) =
- Compounding Frequency (n) = (yearly)
- Time (t) = years
Solution:
Result: Final Amount = $14,693.28 | Interest Earned = $4,693.28
Example 2: Monthly Compounding
Problem: You deposit $5,000 in a savings account with 6% annual interest, compounded monthly for 3 years.
Given:
- Principal (P) =
- Annual Rate (r) =
- Compounding Frequency (n) = (monthly)
- Time (t) = years
Solution:
Result: Final Amount = $5,983.40 | Interest Earned = $983.40
Example 3: Quarterly Compounding with Long Term
Problem: You invest $20,000 for retirement at 7% annual interest, compounded quarterly for 20 years.
Given:
- Principal (P) =
- Annual Rate (r) =
- Compounding Frequency (n) = (quarterly)
- Time (t) = years
Solution:
Result: Final Amount = $80,127.59 | Interest Earned = $60,127.59
Note: Your money more than quadrupled! This shows the incredible power of compound interest over long periods.
Compounding Frequency Comparison
See how different compounding frequencies affect $10,000 at 10% interest over 10 years:
| Frequency | n value | Final Amount | Interest Earned |
|---|---|---|---|
| Annually | 1 | $25,937.42 | $15,937.42 |
| Semi-annually | 2 | $26,532.98 | $16,532.98 |
| Quarterly | 4 | $26,850.64 | $16,850.64 |
| Monthly | 12 | $27,070.41 | $17,070.41 |
| Daily | 365 | $27,181.38 | $17,181.38 |
Key Insight: Daily compounding earns $1,243.96 more than annual compounding over 10 years. While the difference may seem small, it adds up significantly with larger principals and longer time periods!
Simple Interest vs Compound Interest
Most people mix these up. Simple interest only calculates on your original amount. Compound interest calculates on everything—including interest you've already earned. Big difference over time.
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Formula | I = P × r × t | A = P(1 + r/n)^(nt) |
| Interest calculated on | Principal only | Principal + Accumulated Interest |
| Growth pattern | Linear | Exponential |
| Interest on interest | ||
| Better for savers | ||
| Better for borrowers | ||
| Common uses | Car loans, Some personal loans | Savings accounts, Credit cards, Mortgages |
$10,000 at 8% Interest Over Time
| Year | Simple Interest | Compound Interest | Difference |
|---|---|---|---|
| Year 1 | $10,800 | $10,800 | $0 |
| Year 5 | $14,000 | $14,693 | +$693 |
| Year 10 | $18,000 | $21,589 | +$3,589 |
| Year 20 | $26,000 | $46,610 | +$20,610 |
| Year 30 | $34,000 | $100,627 | +$66,627 |
Simple Interest
Same $800/year, every year. Linear growth.
Compound Interest
Each year earns more than the last. Accelerates over time.
Bottom Line
Same $10,000, same 8% rate, same 30 years. Simple interest gets you $34,000. Compound interest gets you over $100,000. That extra $66k didn't come from depositing more money—it came from letting your interest earn interest. The longer the timeframe, the bigger the gap.
Real-World Examples
Here's how compound interest works for actual financial goals people save for. Numbers are based on realistic rates and timeframes.
Retirement Savings
401k or IRA investing
25-year-old puts $5,000 in a retirement account, adds $500/month at 7% average return
Final Amount
$1,320,000+
Key Insight: Wait 10 years to start? You'd end up with roughly $580,000 instead. That decade costs over $700k.
529 College Savings
Education fund for kids
Parents open a 529 when baby is born: $10,000 initial + $200/month at 6%
Final Amount
$105,000+
Key Insight: You only put in $53,200 total. The other $52,000? That's compound interest doing the heavy lifting.
House Down Payment
First-time homebuyer
Couple saves $1,000/month in high-yield savings (5% APY) for 5 years
Final Amount
$68,000+
Key Insight: That extra $8,000 from interest could cover closing costs or buy better appliances.
Emergency Fund
3-6 months expenses
Park $15,000 in a high-yield savings account earning 4.5% APY
Final Amount
$17,100+
Key Insight: Your rainy day fund earns $2,100 just sitting there. Better than 0.01% in a regular savings account.
Car Replacement Fund
Skip the car loan
Set aside $400/month at 4% for 4 years, starting with $2,000
Final Amount
$23,000+
Key Insight: Financing a $23k car at 7% APR costs ~$3,500 in interest. Pay cash and pocket that money instead.
Wedding Savings
Avoid starting marriage in debt
Engaged couple saves $600/month at 4.5% for 2 years, starting with $5,000
Final Amount
$20,200+
Key Insight: Average wedding costs $30k. This gets you 2/3 of the way there without touching credit cards.
What Actually Matters
Start Now
Time beats everything. $100/month at 25 beats $300/month at 35.
Automate It
Set up automatic transfers. You can't spend what you don't see.
Leave It Alone
Every withdrawal resets your compounding. Let it grow.