Compound Interest Calculator
Calculate the growth of your investments over time with compound interest.
What is Compound Interest?
Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. It's often described as "interest on interest," which makes your money grow faster compared to simple interest.
Key Concept:
With compound interest, your investment grows exponentially over time because you earn returns on both your original investment and on the returns you've already earned.
Calculator
Results
Total Amount
After 5 years
Interest Earned
Visual Comparison
Compound vs. Simple Interest
Compound Interest
- Earns interest on previously earned interest
- Grows exponentially over time
- Benefits from higher compounding frequency
- Significantly more powerful for long-term investments
Simple Interest
- Earns interest only on the principal amount
- Grows linearly over time
- Not affected by compounding frequency
- Less effective for long-term growth
How It Works
The compound interest formula used in this calculator depends on the compounding frequency:
For regular compounding:
A = P(1 + r/n)^(nt)
For continuous compounding:
A = P * e^(rt)
Where:
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (as a decimal)
- n = Number of times interest is compounded per year
- t = Number of years
- e = Euler's number (≈ 2.71828) for continuous compounding
The Power of Compounding:
The more frequently interest is compounded, the more your money grows. This is why continuous compounding (theoretical infinite compounding) yields the highest returns, followed by daily, weekly, monthly, and so on.
How to Use
- Enter your initial investment amount in the "Initial Investment" field.
- Input the annual interest rate as a percentage.
- Specify the investment period in years.
- Select how often you want the interest to compound (e.g., Monthly for APR, Annually for APY, or other frequencies).
- The calculator will automatically update the results and graph based on your inputs.
- Compare how different compounding frequencies affect your final amount using the comparison table below.
Frequently Asked Questions
Comprehensive Guide
How Compound Interest Works in Different Investments
Stocks and Mutual Funds
In stocks and mutual funds, compound interest works through price appreciation and dividend reinvestment. When you reinvest dividends, you purchase additional shares, which then generate their own dividends and potential price appreciation. Over time, this compounding effect can significantly increase your returns compared to taking dividends as cash.
Savings Accounts and CDs
Banks typically compound interest daily or monthly in savings accounts and Certificates of Deposit (CDs). The interest is calculated on your principal plus any previously earned interest, then added to your account at the specified interval. Higher compounding frequency (daily vs. monthly) results in slightly higher returns over time.
Where Compound Interest is Used
Common Financial Products with Compound Interest
- Savings accounts: Interest typically compounds daily or monthly
- Certificates of Deposit (CDs): Interest compounds according to terms (daily, monthly, or at maturity)
- Investment accounts: Returns compound through reinvestment of dividends and capital gains
- Retirement accounts: 401(k)s and IRAs benefit from long-term compounding
- Bonds: Some bonds compound interest until maturity
- Credit cards: Interest on unpaid balances often compounds daily (working against you)
- Mortgages: Some mortgage types use compound interest calculations
Compound Interest and Inflation
Inflation erodes the purchasing power of money over time. To truly grow wealth, your investments need to earn a rate of return that exceeds the inflation rate. Compound interest can help achieve this goal, but it's important to consider the "real" rate of return (nominal return minus inflation rate).
Example:
If your investment earns 7% annually but inflation is 3%, your real rate of return is only 4%. This means your purchasing power is growing at 4%, not 7%.
The Power of Compound Interest: Long-term Benefits
The true power of compound interest becomes apparent over long time periods. This is why starting to invest early is so important. Even small amounts invested in your 20s can outperform larger amounts invested in your 40s due to the additional decades of compounding.
The Rule of 72:
A quick way to estimate how long it will take for your money to double is to divide 72 by your annual interest rate. For example, at 8% interest, your money will double approximately every 9 years (72 ÷ 8 = 9).
Comparison Tables
Impact of Different Compounding Frequencies
| Compounding Frequency | Final Amount | % Increase from Principal |
|---|---|---|
| annually | $1276.28 | 27.63% |
| quarterly | $1282.04 | 28.20% |
| monthly | $1283.36 | 28.34% |
| daily | $1284.00 | 28.40% |
| continuously | $1284.03 | 28.40% |
Based on $1000 invested at 5% for 5 years
Compound Interest Investment Vehicles Comparison
| Investment Type | Typical Interest/Return Rate | Compounding Frequency | Risk Level | Liquidity |
|---|---|---|---|---|
| High-Yield Savings | 0.5% - 1.5% | Daily | Very Low | High |
| Certificates of Deposit | 1% - 3% | Daily/Monthly | Low | Low to Medium |
| Government Bonds | 2% - 5% | Semi-annually | Low | Medium |
| Corporate Bonds | 3% - 7% | Semi-annually | Medium | Medium |
| Index Funds | 7% - 10% | Continuous (reinvested) | Medium to High | High |
| Dividend Stocks | 2% - 6% + growth | Quarterly (reinvested) | Medium to High | High |
| Real Estate | 5% - 10% | Varies | Medium to High | Low |
Note: Rates are approximate and can vary based on market conditions, economic factors, and specific investment details.