Compound Interest Calculator

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. This creates a snowball effect where your money grows faster over time, often called the 'eighth wonder of the world'.

More frequent compounding results in higher returns. Daily compounding earns slightly more than monthly, which earns more than quarterly or annually. However, the difference is more significant at higher interest rates and longer time periods.

The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by the annual interest rate to get the approximate number of years. For example, at 8% interest, money doubles in about 72/8 = 9 years.

The effective annual rate accounts for compounding and shows the true annual return. A 12% rate compounded monthly has an EAR of 12.68%, which is higher than 12% compounded annually.

Choose the option that matches your investment product. Savings accounts typically compound daily or monthly, while bonds may compound semi-annually. More frequent compounding is always better for growth, but the practical difference is often minimal unless dealing with large amounts or high interest rates.

It depends on your principal, interest rate, and contributions. For example, investing $500/month at 8% annual return takes about 30 years to reach $1 million. Starting with $10,000 principal and adding $1,000 monthly at 10% takes approximately 20 years. Use the calculator to model your specific scenario.

Simple interest is calculated only on the principal amount throughout the investment period. Compound interest includes interest earned on previous interest, creating exponential growth. For example, $1,000 at 10% for 5 years yields $1,500 with simple interest but $1,610.51 with annual compounding.

Yes, compound interest applies to debt as well as investments. Credit card debt compounds (usually daily), making balances grow rapidly if you only make minimum payments. This is why paying off high-interest debt should typically be prioritized before investing.

Inflation reduces the real purchasing power of your returns. If your investment earns 7% but inflation is 3%, your real return is approximately 4%. Always consider the inflation-adjusted (real) return when planning long-term investments. Historical average inflation in the US is around 2-3% annually.

Historical average annual returns include: high-yield savings accounts 3-5%, bonds 4-6%, stock market index funds 8-10%, real estate 8-12%. Past performance doesn't guarantee future results. Higher returns typically come with higher risk and volatility.