Compound Interest Calculator

Compound interest is the process of earning interest on both your original investment (principal) and on the interest you've already earned. This creates a snowball effect where your money grows at an accelerating rate over time. For example, if you invest $1,000 at 5% annual interest compounded annually, you'll earn $50 in the first year (5% of $1,000). In the second year, you'll earn $52.50 (5% of $1,050), and so on. This is why Albert Einstein allegedly called compound interest the 'eighth wonder of the world.'

Simple interest is calculated only on the original principal, while compound interest is calculated on both the principal and the accumulated interest. With simple interest, a $1,000 investment at 5% would earn exactly $50 each year. With compound interest, the interest earned increases each year as the balance grows. Over long periods, the difference between simple and compound interest becomes substantial. For example, over 30 years, $1,000 at 5% would grow to $2,500 with simple interest but to $4,322 with annual compound interest.

The compounding frequency varies by investment type. Savings accounts and CDs often compound daily or monthly. Bonds typically compound semi-annually. For stocks, the concept of compounding applies to the reinvestment of dividends and capital gains, which can effectively occur at various intervals depending on the investment strategy. Our calculator allows you to select different compounding frequencies to see their impact.

The Rule of 72 is a simple way to estimate how long it will take for an investment to double in value, given a fixed annual rate of interest. Divide 72 by the annual interest rate to get the approximate number of years. For example, if your investment earns 6% per year, it will take approximately 12 years (72 / 6 = 12) to double. It's a quick mental math tool, not an exact calculation.

Inflation erodes the purchasing power of money over time. If your investment returns are 5% but inflation is 3%, your real rate of return (your actual increase in purchasing power) is only 2%. It's important to consider inflation when planning long-term investments to ensure your money grows faster than the cost of living. Our calculator includes an optional inflation rate input to show inflation-adjusted future values.

Both strategies have pros and cons. Historically, lump sum investing has often outperformed regular contributions (dollar-cost averaging) if the market trends upwards, as more money is invested for longer. However, dollar-cost averaging can reduce risk by averaging out purchase prices during market volatility and is often more practical for individuals investing from regular income. The best approach depends on your risk tolerance, financial situation, and market outlook.

Taxes can significantly impact the net growth of your investments. The effect of taxes depends on the type of investment account (e.g., taxable brokerage account, tax-deferred like a 401(k) or traditional IRA, or tax-free like a Roth IRA) and the type of investment income (e.g., interest, dividends, capital gains). Tax-advantaged accounts can allow your investments to compound more effectively by deferring or eliminating taxes on growth. Our calculator includes an optional tax rate input to estimate after-tax returns.

Choosing an appropriate interest rate for retirement planning involves considering your investment mix (asset allocation), time horizon, and risk tolerance. Historically, diversified stock market investments have returned an average of 7-10% annually over the long term, but past performance doesn't guarantee future results. It's often prudent to use a more conservative estimate, such as 4-6%, especially as you get closer to retirement. Consult with a financial advisor for personalized guidance.

Starting to invest early makes a dramatic difference due to the power of compounding over a longer time horizon. Even small, consistent investments made in your 20s can grow significantly more than larger investments started in your 30s or 40s. For example, investing $100 per month from age 25 to 65 at 7% annual return could result in a much larger nest egg than investing $200 per month from age 35 to 65, simply because the money has more time to compound.

Yes, compound interest can work against you when it comes to debt, especially high-interest debt like credit card balances or payday loans. If you're not paying off your debt in full, the interest charged can compound, meaning you'll pay interest on the interest, causing your debt to grow rapidly. This is why it's crucial to manage debt effectively and prioritize paying down high-interest loans.