Compound Interest Calculator - Free Investment Growth Calculator with Regular Contributions and Multiple Compounding Frequencies
Compound Interest Calculator
of each compounding period
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What is Compound Interest?
Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. Often called "interest on interest," it makes your money grow faster than simple interest, which is calculated only on the principal amount. Albert Einstein reportedly called compound interest "the eighth wonder of the world."
The compound interest formula is: A = P(1 + r/n)^(nt), where A is the future value, P is the principal, r is the annual interest rate (as a decimal), n is the number of compounding periods per year, and t is time in years. For continuous compounding, the formula becomes A = Pe^(rt).
How Compounding Frequency Affects Growth
The frequency of compounding significantly impacts your investment growth. More frequent compounding means interest is added to your principal more often, allowing you to earn interest on a larger balance.
Daily compounding earns $197.70 more than annual compounding - a 1.2% increase!
Compound vs Simple Interest
Simple interest is calculated only on the principal: I = P × r × t. Compound interest is calculated on the principal plus accumulated interest, creating exponential growth.
The longer the time period and the higher the interest rate, the more significant this difference becomes.
The Power of Regular Contributions
Adding regular contributions dramatically accelerates wealth building. Even small monthly additions compound over time to create substantial growth through dollar-cost averaging.
Regular contributions more than quadruple your final amount, with nearly 75% of the final value coming from interest!
The Rule of 72
The Rule of 72 is a quick mental math formula to estimate how long it takes to double your money. Simply divide 72 by your interest rate to get the approximate number of years.
This rule works best for interest rates between 6% and 10%, but provides reasonable estimates for rates below 20%. It's a handy tool for quick investment comparisons and planning.
Impact of Taxes on Investment Growth
Taxes significantly reduce investment returns. Interest earned on savings accounts, bonds, and CDs is typically taxed as ordinary income. Tax-advantaged accounts like 401(k) and IRA can help defer or eliminate taxes.
Minimize tax impact by using tax-advantaged retirement accounts, tax-free municipal bonds (for high earners), and holding investments long-term to qualify for lower capital gains rates.
Understanding Inflation's Impact
Inflation erodes purchasing power over time. The average U.S. inflation rate has been around 3% over the past 100 years. Your investment return must exceed inflation to grow real wealth.
For middle-class households with ~25% tax rates, you need at least 4% annual returns just to maintain purchasing power against 3% inflation. This highlights the importance of investing over saving in low-yield accounts.
Frequently Asked Questions About Compound Interest
How do I calculate compound interest?
Compound interest is calculated using the formula: A = P(1 + r/n)^(nt), where A is the future value, P is the principal amount, r is the annual interest rate (as a decimal), n is the number of times interest is compounded per year, and t is time in years. For continuous compounding, use A = Pe^(rt). Our calculator handles all these calculations automatically and also accounts for regular contributions.
What is the difference between simple and compound interest?
Simple interest is calculated only on the principal amount: I = P × r × t. Compound interest is calculated on the principal plus accumulated interest, so you earn "interest on interest." For example, $10,000 at 5% for 10 years yields $5,000 with simple interest, but $6,288.95 with annual compound interest - a difference of $1,288.95. The more frequent the compounding, the more interest you earn.
How does compounding frequency affect my returns?
More frequent compounding leads to higher returns. For example, $10,000 at 5% annual interest for 10 years yields: Annually $16,288.95, Semi-annually $16,386.16, Quarterly $16,436.19, Monthly $16,470.09, Daily $16,486.65, and Continuously $16,487.21. Daily compounding earns $197.70 more than annual compounding. The difference becomes more significant with higher interest rates and longer time periods.
What is the Effective Annual Rate (EAR)?
The Effective Annual Rate (EAR) is the actual annual return, accounting for compounding. It's calculated as EAR = (1 + r/n)^n - 1. For example, a 5% interest rate compounded monthly has an EAR of 5.116%, meaning you actually earn 5.116% per year, not just 5%. EAR allows you to compare investments with different compounding frequencies on an apples-to-apples basis.
How can I maximize my investment growth with compound interest?
Maximize investment growth by: 1) Starting early - time is the most powerful factor in compounding. 2) Making regular contributions - even small monthly additions significantly boost growth. 3) Seeking higher interest rates - shop around for the best rates. 4) Choosing more frequent compounding - daily or monthly compounding earns more than annual. 5) Avoiding early withdrawals - let your money compound uninterrupted. 6) Reinvesting all earnings - don't withdraw interest, let it compound. A 25-year-old investing $200/month at 7% will have $528,000 at age 65, compared to only $244,000 if starting at age 35.
What is the Rule of 72 and how do I use it?
The Rule of 72 is a simple formula to estimate how long it takes to double your money: divide 72 by your annual interest rate. For example, at 8% interest, your money doubles in approximately 72 ÷ 8 = 9 years. At 10%, it takes 72 ÷ 10 = 7.2 years. This rule works best for interest rates between 6% and 10%. It's a quick mental math tool for comparing investments and understanding the power of compound interest without complex calculations.
How do taxes affect my investment returns?
Taxes significantly reduce investment returns. Interest income from savings accounts, bonds, and CDs is typically taxed as ordinary income (up to 37% federal rate for high earners). For example, $10,000 earning 6% for 20 years grows to $32,071 tax-free, but only $26,533 after 25% taxes - a loss of $5,538. Use tax-advantaged accounts like 401(k), IRA, or HSA to defer or eliminate taxes. Roth accounts provide tax-free growth. For taxable accounts, hold investments over 1 year to qualify for lower long-term capital gains rates (0%, 15%, or 20% vs ordinary income rates).
How does inflation impact my investment growth?
Inflation erodes purchasing power, meaning your money buys less over time. With 3% average inflation, $10,000 today will only have $7,441 of buying power in 10 years. Your investment return must exceed inflation to grow real wealth. For example, 5% nominal returns with 3% inflation equals only 2% real returns. After accounting for 25% taxes on interest, you need at least 4% annual returns to maintain purchasing power against 3% inflation. This is why keeping large amounts in low-yield savings accounts (often under 1%) actually loses value over time. Always consider "real return" (return minus inflation) when evaluating investments.