Compound Interest Calculator

What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. In other words, it's 'interest on interest'. This compounding effect causes wealth to grow exponentially over time.

Compound interest is more powerful than simple interest, especially over long periods. It's the foundation of most modern investments, savings accounts, loans, and mortgages.

Compound Interest Formula

The formula for calculating compound interest is:

A = P × (1 + R/n)^(n×T)

I = A - P

Where:

• A = Total Amount (final amount)
• P = Principal Amount (initial investment)
• R = Annual Interest Rate (in decimal form)
• n = Number of times interest is compounded per year
• T = Time Period (in years)
• I = Compound Interest Earned

Example Calculation

If you invest $10,000 at an annual interest rate of 5% compounded monthly for 3 years:

• A = $10,000 × (1 + 0.05/12)^(12×3) = $11,614.72
• Compound Interest = $11,614.72 - $10,000 = $1,614.72
• Compare this to simple interest which would only yield $1,500 (a difference of $114.72)

Compounding Frequencies

• Annually (n = 1): Interest compounded once per year
• Semi-Annually (n = 2): Interest compounded twice per year
• Quarterly (n = 4): Interest compounded four times per year
• Monthly (n = 12): Interest compounded twelve times per year
• Weekly (n = 52): Interest compounded fifty-two times per year
• Daily (n = 365): Interest compounded every day

Common Applications

• Savings accounts and money market accounts
• Certificates of deposit (CDs)
• Bonds and treasury securities
• Investment portfolios and mutual funds
• Retirement accounts (401k, IRA)
• Mortgages and home loans
• Credit card balances
• Student loans and personal loans

The Power of Compound Interest

Albert Einstein reportedly called compound interest 'the eighth wonder of the world', saying 'He who understands it, earns it; he who doesn't, pays it.' The longer your money compounds, the more dramatic the growth becomes.

Example: If you invest $10,000 at 7% annual interest compounded annually:

• After 10 years: $19,671.51
• After 20 years: $38,696.84
• After 30 years: $76,122.55
• After 40 years: $149,744.58

Tips for Using Compound Interest Calculator

• More frequent compounding leads to higher returns
• Start investing early to maximize the compounding effect
• Even small regular contributions can grow significantly over time
• For loans, try to pay more than the minimum to reduce compound interest
• Compare different compounding frequencies to see the impact
• Use compound interest to your advantage with investments, not against you with debt

Simple vs Compound Interest Comparison

For $10,000 invested at 5% for 10 years:

• Simple Interest: $10,000 + ($500 × 10) = $15,000
• Compound Interest (annual): $10,000 × (1.05)^10 = $16,288.95
• Difference: $1,288.95 extra with compound interest