Compound Interest Calculator
Results Summary
Future Value
Total Contributions
Total Interest Earned
APY (Annual Percentage Yield)
Charts
Growth Table
| Year | Starting Balance | Total Contributions | Interest Earned | Ending Balance |
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How Compound Interest Works
Compound interest is the powerful concept of earning "interest on your interest." It works by reinvesting the interest you earn back into your principal amount. This means in the next period, you earn interest on a larger base amount. Over time, this effect snowballs, leading to exponential growth of your investment, which is significantly faster than simple interest.
- Principal: The initial amount of money you invest.
- Interest Rate: The percentage return your investment earns annually.
- Compounding Frequency: How often the interest is calculated and added to your principal (e.g., daily, monthly, annually). More frequent compounding leads to slightly faster growth.
- Contributions: Regular additional investments you make, which accelerates the growth process dramatically.
Example Calculation
Let's see how an investment can grow. Imagine you start with an initial principal of $10,000, contribute $500 every month, and earn an average annual interest rate of 8% compounded monthly. After 20 years:
- Your total contributions would be $130,000 ($10,000 initial + $500 x 12 months x 20 years).
- You would have earned approximately $165,330 in interest alone.
- Your final investment value would be an impressive $295,330!
This example highlights how consistent contributions and the power of compounding can build substantial wealth over the long term.
Tips to Grow Your Wealth Faster
- Start Early: The longer your money has to grow, the more powerful compounding becomes. Time is your greatest asset.
- Contribute Consistently: Make regular contributions a habit, no matter how small. Automated deposits can help ensure you stay on track.
- Increase Your Contributions: Whenever you get a raise or have extra income, increase your regular contribution amount. This can significantly shorten the time to reach your financial goals.
- Optimize Your Rate of Return: While higher returns come with higher risk, a well-diversified portfolio can help you achieve a better long-term average return than a standard savings account.
Frequently Asked Questions (FAQ)
Compound interest is the interest you earn on both your initial investment (the principal) and the accumulated interest from previous periods. It's often called "interest on interest" and is a key driver of long-term wealth growth.
Inflation reduces the purchasing power of your money over time. While your investment grows with compound interest, inflation erodes its real value. An inflation-adjusted calculation shows you what your future balance will be worth in today's dollars, giving you a more realistic picture of your wealth.
Simple interest is calculated only on the initial principal amount. Compound interest is calculated on the principal plus any interest that has already been earned. Over time, compound interest leads to significantly higher returns.
The amount depends on your goal, time horizon, and expected rate of return. Use this calculator by entering your goal amount and adjusting the 'Contribution Amount' until the 'Future Value' meets or exceeds your target. This helps you work backward to find a suitable monthly investment.
Yes, but the difference is often minimal for most investors. The more frequently interest is compounded, the faster your money grows. While daily compounding is technically better than monthly, the most significant factors for growth are your interest rate, contribution amount, and the length of time you stay invested.
Regular contributions have a massive impact on long-term growth. They consistently increase your principal, meaning each new deposit starts earning its own compound interest. Over decades, the total contributions can become a larger driver of your portfolio's growth than the initial principal.
