Compound Interest Calculator

Compound interest is often described as "interest on interest" — it's the result of reinvesting interest rather than paying it out, so that interest in the next period is earned on the principal sum plus previously accumulated interest. This powerful concept is the key to long-term wealth building.

The Compound Interest Formula

Where:

• A = Final amount
• P = Principal (initial investment)
• r = Annual interest rate (as a decimal)
• n = Number of times interest is compounded per year
• t = Time period in years

With Regular Contributions

Where PMT is the regular payment or contribution amount.

The Power of Compound Interest

Compound interest demonstrates why investing early is so powerful. Consider two scenarios:

Scenario 1: Early Investor

Emily invests $5,000 at age 25 and adds nothing more. At 8% annual interest compounded monthly, by age 65:

• Initial investment: $5,000
• Final amount at age 65: $160,000+
• Interest earned: $155,000+

Scenario 2: Late Starter

Michael starts at age 35, investing $5,000 initially plus $1,000 annually. At the same 8% interest rate:

• Total invested by age 65: $35,000
• Final amount: $157,000+
• Interest earned: $122,000+

Despite investing $30,000 more than Emily, Michael ends up with less money because Emily had 10 more years of compound growth.

Compounding Frequency

The frequency of compounding affects the total amount earned. More frequent compounding results in higher returns:

The Rule of 72

A quick way to estimate how long it will take to double your money is to use the Rule of 72:

For example, with an 8% annual return, it would take approximately 72 ÷ 8 = 9 years to double your investment.

Inflation Considerations

When planning long-term investments, it's important to consider the effects of inflation, which erodes purchasing power over time. To calculate the "real" return (adjusted for inflation):

For example, an 8% nominal return with 3% inflation results in approximately a 5% real return.

Note: This calculator provides estimates based on constant interest rates and contribution amounts. Actual results may vary due to changing interest rates, market conditions, fees, and taxes. Always consult with a financial professional for personalized investment advice.