How Compound Interest Works
Compound interest means earning interest on your interest. When you invest money, you earn a return on your principal. Then in the next period, you earn a return on both your original principal and the interest you already earned. Over time this creates exponential growth rather than linear growth.
The Formula
A = P ร (1 + r/n)^(nรt)
With regular contributions:
A = P ร (1 + r/n)^(nรt) + C ร [((1 + r/n)^(nรt) - 1) / (r/n)]
A = final amount. P = principal. r = annual rate as decimal. n = compounding periods per year. t = years. C = monthly contribution.
The Power of Regular Contributions
A one-time investment of 10,000 at 7% for 20 years grows to approximately 40,000. The same 10,000 with an additional 200 per month grows to approximately 104,000. The monthly contributions more than double the final result.
Compound Interest Growth Examples
Starting principal of 10,000, monthly compounding, no additional contributions.
| Years | At 4% | At 7% | At 10% | Interest at 7% |
|---|
| 5 years | 12,190 | 14,150 | 16,450 | 4,150 |
| 10 years | 14,860 | 20,020 | 27,050 | 10,020 |
| 20 years | 22,080 | 40,080 | 73,220 | 30,080 |
| 30 years | 32,810 | 80,500 | 198,370 | 70,500 |
| 40 years | 48,760 | 161,700 | 537,000 | 151,700 |
Frequently Asked Questions
What is the difference between compound and simple interest?+
Simple interest is calculated only on your original principal. Compound interest is calculated on your principal plus all previously earned interest. At 7% over 20 years, compound interest produces far more than simple interest on the same investment. Use the result as a loan estimate, not as a guaranteed quote. Real loan cost can change with lender fees, compounding method, repayment frequency, early repayment rules, credit score, taxes, insurance, and variable interest rates. Compare the calculator output with the official loan agreement before making a decision.
How does compounding frequency affect returns?+
More frequent compounding means interest is added to your balance more often, so you earn interest on a slightly larger amount each time. Daily compounding produces more than monthly, which produces more than annual. Over very long periods the difference becomes noticeable. Use the result as a loan estimate, not as a guaranteed quote. Real loan cost can change with lender fees, compounding method, repayment frequency, early repayment rules, credit score, taxes, insurance, and variable interest rates. Compare the calculator output with the official loan agreement before making a decision.
What rate should I use for long-term investing?+
For long-term stock market projections, 7% per year is a commonly used conservative assumption. For savings accounts you may use a lower rate, often around 2% to 4% depending on the country and institution. Use the result as a loan estimate, not as a guaranteed quote. Real loan cost can change with lender fees, compounding method, repayment frequency, early repayment rules, credit score, taxes, insurance, and variable interest rates. Compare the calculator output with the official loan agreement before making a decision.
Does this calculator include tax?+
No. This calculator shows gross growth before tax. If you want an after-tax projection, reduce the interest rate input by your effective tax drag or model the tax separately. Use the result as a loan estimate, not as a guaranteed quote. Real loan cost can change with lender fees, compounding method, repayment frequency, early repayment rules, credit score, taxes, insurance, and variable interest rates. Compare the calculator output with the official loan agreement before making a decision.
What is the rule of 72?+
Divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 6% it takes around 12 years. At 8% it takes around 9 years. Use the result as a loan estimate, not as a guaranteed quote. Real loan cost can change with lender fees, compounding method, repayment frequency, early repayment rules, credit score, taxes, insurance, and variable interest rates. Compare the calculator output with the official loan agreement before making a decision.