Compound Interest Calculator - Calculate Investment Growth
Calculate compound interest with different compounding periods. See how your investments grow over time with our free calculator.
Our Compound Interest Calculator helps you see how your investments grow over time through the power of compounding. Enter your initial investment amount, interest rate, time period, and compounding frequency to calculate how your money can grow exponentially.
How This Tool Works
Our compound interest calculator uses different formulas depending on the compounding frequency selected:
Regular Compounding: A = P(1 + r/n)^(nt)
Continuous Compounding: A = Pe^(rt)
Where:
- A: Final amount
- P: Principal (initial investment)
- r: Annual interest rate (decimal)
- n: Number of times interest is compounded per year
- t: Time in years
- e: Euler's number (approximately 2.71828)
For regular contributions, the calculator uses the future value of an annuity formula:
FV = PMT × ((1 + r)^n - 1) / r
Where:
- FV: Future value of the contributions
- PMT: Regular contribution amount
- r: Interest rate per contribution period
- n: Total number of contribution periods
Unlike simple interest, compound interest calculates interest on both the initial principal and the accumulated interest from previous periods, leading to exponential growth over time.
Frequently Asked Questions
What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. This means you earn "interest on interest," creating a snowball effect that accelerates your investment growth over time. It's the reason behind the phrase "let your money work for you" and is a fundamental principle in wealth building and long-term investing.
How does compounding frequency affect my returns?
The more frequently interest is compounded, the higher your returns will be. For example, monthly compounding will yield more than annual compounding for the same principal, interest rate, and time period. This happens because with more frequent compounding, interest is calculated and added to your balance more often, allowing subsequent interest calculations to be based on a larger principal amount. The difference becomes more significant with higher interest rates and longer time periods.
What is the Rule of 72?
The Rule of 72 is a simple formula to estimate how long it will take for an investment to double in value with compound interest. Simply divide 72 by the annual interest rate (in percentage) to get the approximate number of years. For example, an investment with an 8% annual return will double in about 72 ÷ 8 = 9 years. This rule works best for interest rates between 6% and 10% and assumes annual compounding.
Should I make regular contributions to my investments?
Yes, making regular contributions to your investments can significantly increase your final balance due to the power of compound interest. Regular contributions take advantage of dollar-cost averaging (investing a fixed amount at regular intervals), which can reduce the impact of market volatility. Furthermore, starting early with regular contributions, even if they're small, often yields better results than waiting to invest a larger lump sum later, due to the extra time for compounding to work.
Tips and Best Practices
Tips for maximizing compound interest:
- Start early: Time is the most powerful factor in compound interest. The earlier you start investing, the more time your money has to grow.
- Contribute regularly: Making consistent contributions increases your principal and accelerates growth.
- Reinvest dividends: Automatically reinvesting dividends or interest payments keeps your money compounding.
- Choose investments with higher returns: Higher interest rates lead to faster compounding, though often with increased risk.
- Look for accounts with frequent compounding: Accounts that compound daily or monthly will grow faster than those that compound annually.
- Don't withdraw early: Withdrawing money early reduces the principal amount that can compound over time.
- Consider tax-advantaged accounts: Retirement accounts like 401(k)s and IRAs allow your investments to grow tax-deferred or tax-free, enhancing the compound effect.