Compound Interest Calculator

How Compound Interest Works

Compound interest is 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 lets your money grow exponentially over time.

The Compound Interest Formula

Where: A = future value, P = principal, r = annual rate, n = compounds per year, t = years, PMT = regular contribution per period.

Why Compounding Frequency Matters

The more frequently interest compounds, the more you earn. Daily compounding produces slightly more than monthly, which produces more than annual. At typical interest rates, the difference between monthly and daily compounding is minimal — but between annual and monthly, it’s meaningful over decades.

The Power of Monthly Contributions

Adding even small monthly contributions dramatically increases your final balance. A $500/month contribution at 7% annual return grows to over $260,000 in 20 years — even though you only contributed $120,000 out of pocket. The rest is compounding doing the work.

Tips for Maximizing Compound Interest

• Start early. Time is the most powerful variable in the compound interest formula. 10 years of extra compounding can double your returns.
• Increase contributions gradually. Bump your monthly contribution by $50-100/year as your income grows.
• Reinvest dividends. Ensure dividends and interest payments compound rather than sitting in cash.
• Choose tax-advantaged accounts. 401(k)s and IRAs let your money compound without annual tax drag.
• Don’t withdraw early. Every withdrawal resets the compounding clock on that money.