Compound Interest Calculator

What is Compound Interest?

Compound interest is interest calculated on the initial principal andon the accumulated interest of previous periods. Albert Einstein is often (though apocryphally) credited with calling it "the eighth wonder of the world," and the phrase captures a genuine mathematical truth: when returns are reinvested, the value of an investment grows exponentially rather than linearly. This is the engine behind long-term wealth building, and understanding it is arguably the single most important concept in personal finance.

The contrast with simple interest is stark. A $10,000 deposit at 7% simple interest earns a flat $700 per year, reaching $24,000 after 20 years. The same deposit at 7% compounded annually grows to roughly $38,697 in the same period — nearly 50% more — purely because each year's interest itself earns interest in subsequent years. Over 40 years the gap widens to $28,000 vs. $149,745. This exponential effect is why most financial professionals emphasize starting to invest early, even with small amounts, rather than waiting until later in life.

Compound interest applies to both sides of the balance sheet. It works in your favor in savings accounts, certificates of deposit, index funds, and retirement accounts. It works against you on credit card balances, payday loans, and any unpaid debt, which is why high-interest debt is typically prioritized for repayment before investing aggressively.

How is it Calculated?

The compound interest formula is:

FV = PV × (1 + r/n)^(n × t)

where FV is future value, PV is present value (principal), r is the annual interest rate (as decimal), n is the number of compounding periods per year, and t is time in years.

Worked example:$5,000 invested at 8% compounded monthly for 20 years. FV = 5000 × (1 + 0.08/12)^(12 × 20) = 5000 × 1.006667^240 ≈ 5000 × 4.926 ≈ $24,630. Total interest earned ≈ $19,630 — nearly four times the original principal.

Key Facts & Tips

• Rule of 72: years to double ≈ 72 ÷ annual return (e.g. 7% doubles in ~10.3 years).
• Time is more powerful than rate: an extra 10 years of compounding can outperform a 2% higher return.
• Fees matter — a 1% annual fee can reduce a 40-year portfolio by roughly 25%.
• Regular contributions dramatically outperform large one-off deposits on long horizons.
• Always compare annual percentage yield (APY), which accounts for compounding frequency.

Frequently Asked Questions