Compound Interest
Growth of money with reinvested interest.
What does Compound Interest mean?
Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only earns on the original amount, compound interest allows your money to grow exponentially over time. This "interest on interest" effect is one of the most powerful concepts in finance and is the driving force behind long-term wealth building.
How to calculate Compound Interest
The compound interest formula is A = P(1 + r/n)^(nt), where A is the final amount, P is the principal (initial investment), r is the annual interest rate (as a decimal), n is the number of times interest compounds per year, and t is the number of years. For example, $1,000 invested at 5% annual interest compounded monthly for 10 years gives A = 1000(1 + 0.05/12)^(12×10) = $1,647.01.
FAQ
Simple interest is calculated only on the original principal, so it grows linearly. Compound interest is calculated on both the principal and any previously earned interest, leading to exponential growth. Over long periods, compound interest generates significantly more returns than simple interest.
The more frequently interest compounds, the more you earn. Common compounding frequencies are annually, semi-annually, quarterly, monthly, and daily. Monthly or daily compounding is typical for savings accounts and investments. The difference between monthly and daily compounding is usually small, but the jump from annual to monthly compounding can be significant.
Yes. Enter your initial savings, set a regular monthly contribution, choose your expected interest rate, and adjust the time period. The calculator will show you the total amount you will accumulate, helping you see whether your savings plan meets your goal — or how much more you need to contribute each month.
Use this calculator to estimate term deposit earnings. Enter your deposit amount as the principal, set the annual interest rate offered by your bank, choose the compounding frequency (most term deposits compound monthly or at maturity), and set the term length. Leave the regular contribution at zero for a standard term deposit.
Compound interest is the engine behind retirement savings growth. Enter your current savings as the principal, add your regular monthly or yearly contributions, set a realistic long-term return rate (historically 7–10% for diversified stock portfolios), and set the number of years until retirement. The result shows your projected retirement nest egg.
Yes. Compound interest works the same way on debt — unpaid interest gets added to the balance, and future interest is charged on the larger amount. This is why credit card debt and high-interest loans can grow rapidly if only minimum payments are made.
Continuous compounding is the theoretical limit of compounding frequency, where interest is calculated and added to the balance at every instant. The formula uses the mathematical constant e: A = Pe^(rt). In practice, daily compounding produces nearly identical results.
Higher compounding frequency means interest is calculated and reinvested more often, resulting in slightly higher returns. For a $10,000 deposit at 5% for 10 years: annual compounding yields $16,288.95, monthly yields $16,470.09, and daily yields $16,486.65. The benefit of increasing frequency has diminishing returns.
A regular savings account lets you deposit and withdraw freely, usually with a variable interest rate. A term deposit locks your money for a fixed period at a guaranteed rate. Both use compound interest, but term deposits typically offer higher rates in exchange for less flexibility. Use this calculator for either scenario — just adjust contributions and compounding accordingly.
Related calculators
- Simple Interest— Interest calculated only on principal.
- CAGR— Average annual growth rate.
- Rule of 72— Estimate doubling via interest rate.
- NPV— Net present value of future cash flows.
- Time Value of Money— Present vs future value.