Compound Interest Calculator
See how your savings grow over time with compounding.
What Is Compound Interest?
Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan. Thought of as "interest on interest," compound interest will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.
The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest.
Compound Interest and APY: Note that the Annual Percentage Yield (APY) is the real-world annualized rate that accounts for compounding frequency. While your stated interest rate might be 5%, daily compounding makes the APY slightly higher, reflecting your true yield.
How to Use This Calculator
- Enter your principal (starting investment or deposit).
- Enter the annual interest rate.
- Choose your compounding frequency — daily, monthly, quarterly, semi-annually, or annually.
- Enter the time period in years or months.
- Optionally add recurring contributions and choose when they're applied.
- View your total interest, final balance, and growth breakdown instantly.
Simple Interest vs. Compound Interest
Here is a practical comparison of how an initial investment of $10,000 grows over various horizons at an 8% annual return, comparing Simple Interest vs. Compound Interest (compounded annually):
| Investment Period | Simple Interest Total | Compound Interest Total | Wealth Difference |
|---|---|---|---|
| 5 Years | $14,000 | $14,693 | +$693 |
| 10 Years | $18,000 | $21,589 | +$3,589 |
| 20 Years | $26,000 | $46,610 | +$20,610 |
| 30 Years | $34,000 | $100,627 | +$66,627 |
As you can see, the compounding effect accelerates dramatically over longer time horizons.
Step-by-Step Example
If you start with $5,000 at a 7% annual rate compounded monthly for 10 years:
- Principal: $5,000
- Monthly Rate (r/n): 7% / 12 = 0.583%
- Total Periods (n*t): 12 * 10 = 120 months
- Final Amount: $5,000 * (1 + 0.00583)^120 = $10,048 You essentially double your money without adding any extra deposits!
Compound Interest Formula
To calculate compound interest (or the future value of your investment), you use the standard compounding formula:
$$A = P \left(1 + \frac{r}{n}\right)^{nt}$$
Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (the initial deposit)
- r = the annual interest rate (decimal format, e.g., 0.05 for 5%)
- n = the number of times that interest is compounded per unit $t$ (usually per year)
- t = the time the money is invested or borrowed for (usually in years)
Compounding Frequency: Daily vs. Monthly vs. Annually
The compounding frequency is the number of times the interest is calculated and added to the principal balance per year. Standard intervals include:
- Annual (n = 1): Interest is calculated once a year.
- Semi-Annual (n = 2): Interest is calculated twice a year (every 6 months).
- Quarterly (n = 4): Interest is calculated four times a year (every 3 months).
- Monthly (n = 12): Interest is calculated monthly. This is commonly used when making regular monthly deposits into a SIP.
- Daily (n = 365): Interest is calculated every single day.
Why Compounding Frequency Matters More Over Time The difference between compounding frequencies shrinks in relative terms but grows in absolute dollars over long horizons. For example, if you invest $10,000 at a 6% interest rate for 5 years:
- Compounded Annually: $13,382.26
- Compounded Monthly: $13,488.50
- Compounded Daily: $13,498.26
The longer your money compounds, the more pronounced the difference becomes between annual and daily compounding.
Frequently Asked Questions (FAQs)
What is the difference between simple and compound interest?
Simple interest is calculated only on the initial principal amount. Compound interest is calculated on the principal plus any accumulated interest from prior periods, leading to exponential growth over time.
What is the Rule of 72?
The Rule of 72 is a quick way to estimate how long it will take to double your investment at a fixed interest rate. Divide 72 by your annual interest rate to get the approximate number of years. For exact growth rate calculations over time.
How does inflation impact my compounded wealth?
While compound interest increases the nominal value of your savings, inflation reduces purchasing power. A 5% interest rate with 3% inflation yields a real return of roughly 2%.