What is Compound Interest?
Compound interest means you earn interest not only on your original deposit, but also on all the interest you have already earned. Over time, this creates exponential growth — commonly called the "snowball effect."
The formula is: A = P(1 + r/n)^(nt), where:
- A = Final amount
- P = Principal (starting deposit)
- r = Annual interest rate (as a decimal)
- n = Compounding frequency per year
- t = Time in years
Key Factors That Affect Your Growth
- Initial Deposit: The starting seed for your investment. The bigger it is, the more you earn from the start.
- Interest Rate: Higher rates accelerate growth but often come with more risk.
- Compounding Frequency: Monthly compounding beats annual compounding. The more often interest is added, the faster your money grows.
- Time: The single most powerful factor. Starting just 5 years earlier can potentially double your final result.
- Monthly Contributions: Regular top-ups dramatically boost the end result over long time periods.
How to Use the Compound Interest Calculator
1Enter your Starting Balance (the amount you have today).
2Enter your Annual Interest Rate (e.g., 7 for 7%).
3Set how many years you plan to invest.
4Optionally, add a Monthly Contribution to simulate regular savings.
5Click Calculate to see a year-by-year breakdown table.
💡 Rule of 72: To estimate how long it takes to double your money, divide 72 by the interest rate. At 7% interest, your money doubles in approximately 10.3 years.
Compound vs. Simple Interest
Simple interest only earns on the principal. Compound interest earns on everything. Over 30 years at 7%, $10,000 grows to:
- Simple Interest: $31,000
- Compound Interest (monthly): $81,165
FAQ
What compounding frequency should I use?
Most savings accounts and investment funds compound monthly or daily. When comparing investments, monthly compounding is the most common realistic assumption for long-term wealth planning.
Is a higher interest rate always better?
Not necessarily — higher rates come with higher risk. A diversified index fund averaging 7–10% annually over 20+ years is generally considered a solid, realistic goal.