Calculate how your investments grow over time with compound interest. Features customizable interest rates and frequency.
Albert Einstein reputedly called compound interest the "eighth wonder of the world." Whether or not he actually said it, the mathematical principle remains one of the most powerful forces in finance. Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal plus the accumulated interest. This "interest on interest" effect causes wealth to grow exponentially over time rather than linearly.
To understand the power of compounding, let's compare it to simple interest. Suppose you invest $10,000 at a 5% annual interest rate for 3 years.
| Year | Simple Interest (5%) | Compound Interest (5%) |
|---|---|---|
| Year 1 | $500 (Total: $10,500) | $500 (Total: $10,500) |
| Year 2 | $500 (Total: $11,000) | $525 (Total: $11,025) |
| Year 3 | $500 (Total: $11,500) | $551.25 (Total: $11,576.25) |
In the second year of compounding, you earned interest on your original $10,000 plus the $500 interest from the first year. By year 3, the gap widens. Over 30 years, this difference becomes massive.
The variable n in the formula is crucial. The more frequently interest is compounded, the faster your money grows.
Time is the most significant factor in compounding. Starting 10 years earlier can double your final amount, even with smaller contributions.
If you own stocks, reinvesting dividends allows you to buy more shares, which then generate more dividends, accelerating the cycle.
The Rule of 72 is a mental shortcut to estimate how long it takes to double your money. Divide 72 by your interest rate. For example, at 8% interest, your money doubles in 9 years (72 รท 8 = 9).
No, this calculator shows the nominal future value. To see the real purchasing power, you would need to subtract the inflation rate from your interest rate.
Compound interest itself is a mathematical principle. The risk depends on the underlying investment (e.g., stocks vs. savings accounts). However, compound interest can work against you in debt, such as credit card balances.