Compound Interest Calculator
Compound interest is often called the "eighth wonder of the world." Use our professional calculator to see how small, consistent investments can grow into a significant nest egg over time.
What Is Compound Interest?
Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. Unlike simple interest, which is only calculated on the principal amount, compound interest allows your wealth to grow exponentially.
In simpler terms, it's "interest on interest." Over long periods, this compounding effect can lead to dramatic growth in your savings, even if you only start with a small amount.
Key Takeaway
The two most important factors in compound interest are time and consistency. Starting early gives your money more time to compound, which is often more valuable than the total amount you contribute.
How Does Compound Interest Work?
The power of compound interest depends on three primary variables:
- Principal: The initial amount of money you invest.
- Interest Rate: The annual percentage rate at which your money grows.
- Compounding Frequency: How often interest is added back to your balance (daily, monthly, annually).
As interest is added to your account, your balance increases. In the next period, interest is calculated based on this new, higher balance. This cycle repeats, causing your wealth to grow faster and faster over time.
The Compound Interest Formula
The standard formula for compound interest is:
A = P(1 + r/n)^(nt)Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per unit t
- t = the time the money is invested or borrowed for