Compound Interest Calculator
Calculate how your investments grow over time with the power of 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's the reason investments can grow exponentially over time.
The Power of Compounding
Albert Einstein allegedly called compound interest "the eighth wonder of the world." When you reinvest your earnings, those earnings generate their own earnings, creating a snowball effect that accelerates wealth building.
Why Compound Interest Matters
Time Is Your Greatest Asset
The longer your money compounds, the more dramatic the growth. Starting early is more important than contributing more later. $5,000 invested at age 25 will grow more than $10,000 invested at age 35.
Frequency Matters
More frequent compounding leads to slightly higher returns. Daily compounding earns more than annual compounding, though the difference is modest compared to time and rate of return.
How to Maximize Compound Interest
Start Investing Early
Every year you wait significantly reduces the compounding effect. Even small amounts invested in your 20s outperform larger amounts invested in your 40s.
Reinvest All Returns
Always reinvest dividends, interest, and capital gains rather than taking them as cash. This puts compounding into overdrive.
Choose Investments Wisely
Focus on investments with solid long-term return potential. Historically, stock market index funds have averaged 10% annually.
Frequently Asked Questions
What is compound interest and how does it work?
Compound interest is interest calculated on both your initial investment (principal) and all accumulated interest from previous periods. Unlike simple interest, it allows your money to grow exponentially.
What is the Rule of 72?
The Rule of 72 estimates how long it takes for an investment to double. Divide 72 by your annual interest rate. At 8% return, your money doubles in approximately 9 years (72 ÷ 8 = 9).
How much difference does starting early make?
Starting early makes an enormous difference. Someone who invests $5,000/year from age 25-35 and then stops will have more at retirement than someone who invests $5,000/year from age 35-65, assuming 8% returns.
Can compound interest work against me?
Yes! Compound interest works against you with debt, especially credit card debt. Interest compounds on your debt, making it grow exponentially.