Compound Interest Calculator

• What is Compound Interest?
• How to Calculate Compound Interest
• Using Our Compound Interest Calculator
• Frequently Asked Questions

What is Compound Interest?

Compound interest is the process where the interest earned on an initial amount (principal) also earns interest over time. Unlike simple interest, which only pays on the initial principal, compound interest pays on both the principal and any accumulated interest, allowing your investment to grow at an accelerated rate. This 'interest on interest' effect makes compound interest a powerful tool for building wealth over time, whether in a savings account, investment portfolio, or retirement fund.

Compound interest can work for you when you save or invest money. However, it can also work against you if you borrow money, as it leads to larger payments over time.

Compound Interest Formula

The formula to calculate compound interest is as follows:

A = P \times \left ( 1 + \dfrac{r}{n} \right )^{nt}

Where:

• A = The future value of the investment/loan, including interest.
• P = The principal investment amount (the initial deposit or loan amount).
• r = The annual interest rate (decimal).
• n = The number of times that interest is compounded per unit time.
• t = The time the money is invested or borrowed for, in years.

For example, if you deposit $1,000 in an account that offers a 5% annual interest rate, compounded monthly, and leave it there for 10 years, the calculation would show the power of compounding over time.

How to Calculate Compound Interest

To calculate compound interest manually, follow these steps:

• Identify the Principal (initial amount of money).
• Set the Rate: Define the annual interest rate in decimal form (e.g., 5% becomes 0.05).
• Select the Frequency of Compounding: Interest can compound annually, semi-annually, quarterly, monthly, daily, or even continuously.
• Determine the Investment Duration: Specify the time in years.
• Use the Compound Interest Formula: Plug the values into the formula to find the total balance at the end of the investment term.

Example Calculation

Let's assume:

• Principal: $5,000
• Annual Interest Rate: 6% (0.06 in decimal)
• Compounding Frequency: Monthly
• Investment Duration: 5 years

Using the formula:

A = 5000 \times \left ( 1 + \dfrac{0.06}{12} \right )^{12 \times 5} = 6744.25

After calculating, the result will show the future balance and total interest earned.

Using Our Compound Interest Calculator

Our Compound Interest Calculator simplifies the process, providing instant results based on your inputs. Follow these easy steps:

• Enter the Principal: Input the initial amount (e.g., $5,000).
• Choose the Compounding Frequency: Select how often the interest compounds (annually, semi-annually, quarterly, monthly, or daily).
• Enter the Investment Duration: Fill in the years and, optionally, additional months.
• Input the Annual Interest Rate: Provide the interest rate as a percentage (e.g., 6%).
• Monthly Contribution (Optional): If you plan to make additional monthly contributions, enter the amount. This field is optional but can significantly impact your results by increasing your final balance.

After you’ve entered all necessary fields, simply click 'Calculate,' and the calculator will display the total balance, total contributions, and the interest earned over time. Our calculator also provides a detailed line chart showing the growth over each year, helping you visualize the compound interest effect.

Frequently Asked Questions

• What’s the difference between compound interest and simple interest? Simple interest only calculates interest on the principal, while compound interest calculates interest on both the principal and the accrued interest. This compounding results in a faster growth rate over time.
• How often should interest be compounded for the best returns? The more frequently interest compounds, the higher the overall interest earned. Daily compounding generates the most interest, followed by monthly, quarterly, semi-annually, and annually.
• Can compound interest be applied to loans? Yes, loans like credit cards or mortgages can use compound interest, which can increase the total amount owed over time if not managed carefully.
• Why should I make regular contributions to my investments? Regular contributions amplify the compounding effect by continuously adding to the principal. Even small amounts add up over time and accelerate growth.