Compound Interest Calculator
Calculate compound interest, future value, and total investment returns
Enter Investment Details
Initial investment amount
Expected annual return percentage
Investment duration in years
How often interest is compounded
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About Compound Interest
What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Often called "interest on interest," it causes wealth to grow exponentially over time, making it one of the most powerful concepts in finance.
Formula
A = P(1 + r/n)^(nt)
Total Interest = A - P
- A = Future value of investment/loan (principal + interest)
- P = Principal amount (initial investment)
- r = Annual interest rate (as decimal)
- n = Number of times interest is compounded per year
- t = Time in years
Compounding Frequencies
- Annually (n=1): Interest compounded once per year
- Semi-Annually (n=2): Interest compounded twice per year
- Quarterly (n=4): Interest compounded four times per year
- Monthly (n=12): Interest compounded twelve times per year
- Daily (n=365): Interest compounded every day
More frequent compounding results in higher returns due to interest being calculated on interest more often.
Example
If you invest $10,000 at 7% annual interest compounded monthly for 5 years:
A = 10,000 × (1 + 0.07/12)^(12×5) = $14,147.78
Interest Earned = $14,147.78 - $10,000 = $4,147.78
Compare this to simple interest which would only earn $3,500!
Common Applications
- Savings accounts and certificates of deposit (CDs)
- Retirement accounts (401k, IRA, Roth IRA)
- Investment portfolios and mutual funds
- Bonds and treasury securities
- Student loans and mortgages (debt perspective)
The Power of Compounding
- Time is your friend: The longer you invest, the more dramatic the compounding effect
- Start early: Even small amounts can grow significantly over decades
- Frequency matters: More frequent compounding = higher returns
- Exponential growth: Returns accelerate over time, not linear growth
- Einstein's quote: "Compound interest is the eighth wonder of the world"
Simple vs Compound Interest
| Aspect | Simple Interest | Compound Interest |
|---|---|---|
| Calculation | On principal only | On principal + interest |
| Growth | Linear | Exponential |
| Returns | Lower | Higher |
| Best for | Short-term loans | Long-term investments |