How does compound interest work?

Compound interest is earned on both your original investment (principal) and previously earned interest. Formula: A = P(1 + r/n)^(nt), where A is final amount, P is principal, r is annual interest rate, n is compounding frequency, and t is time in years.

What's the difference between simple and compound interest?

Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal plus any previously earned interest, creating exponential growth over time.

How often should interest compound for maximum growth?

More frequent compounding generally results in higher returns. Daily compounding typically yields the highest returns, followed by monthly, quarterly, semi-annually, and annually.

What is the Rule of 72 for compound interest?

The Rule of 72 estimates how long it takes to double your money. Divide 72 by your annual interest rate. For example, at 6% interest, your money doubles in approximately 72÷6 = 12 years.

How much should I invest for retirement?

Financial experts often recommend saving 10-15% of your income for retirement. Starting early with compound interest can significantly increase your retirement savings due to the power of compounding over decades.

Free Compound Interest Calculator

What is Compound Interest?

Compound interest is "interest on interest" - the interest calculated on both the initial principal and the accumulated interest from previous periods. It's one of the most powerful concepts in finance and investing.

Einstein reportedly called it: "The eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

Formula: A = P(1 + r/n)^(nt)
Where: A = Final Amount, P = Principal, r = Annual Rate, n = Compound Frequency, t = Time (years)

Basic Compound Interest Calculator

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Advanced Compound Interest Calculator

Include regular monthly contributions for more accurate projections.

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Monthly Contribution ($) Regular monthly deposits to your investment

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Expected Inflation Rate (%) - Optional Adjusts final value for purchasing power

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Retirement Planning Calculator

Plan for your retirement with compound interest projections.

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Expected Annual Return (%) Historical stock market average: ~7-10%

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Compound Interest Examples

Example 1: Basic Investment

Investment: $10,000 at 7% for 10 years, compounded monthly

Formula: $10,000 × (1 + 0.07/12)^(12×10)

Result: $20,096.61 (total interest: $10,096.61)

Key Insight: Your money nearly doubled in 10 years!

Example 2: The Power of Starting Early

Scenario A: Start at 25, invest $200/month for 40 years at 7%

Result A: ~$1,050,000 (contributions: $96,000)

Scenario B: Start at 35, invest $400/month for 30 years at 7%

Result B: ~$490,000 (contributions: $144,000)

Lesson: Starting 10 years earlier with half the contribution yields more than double the result!

Example 3: Retirement Planning

Profile: 30-year-old, retire at 65, currently has $5,000 saved

Monthly contribution: $500 at 7% annual return

Time horizon: 35 years

Projected result: ~$1,170,000 at retirement

Total contributions: $215,000 (principal + monthly)

Example 4: Daily vs Annual Compounding

Investment: $25,000 at 6% for 20 years

Annual compounding: $80,178

Daily compounding: $82,218

Difference: $2,040 more with daily compounding

Takeaway: Compounding frequency matters more with larger amounts and longer periods

How to Use Compound Interest for Wealth Building

The 4 Key Factors of Compound Interest

Principal: The initial amount you invest - start with what you can afford
Interest Rate: Higher rates accelerate growth - diversify for optimal returns
Time: The most powerful factor - start as early as possible
Compounding Frequency: More frequent = slightly higher returns

Investment Strategies for Maximum Compound Growth

Start Early: Even small amounts can grow significantly over decades
Consistency: Regular monthly contributions accelerate growth
Patience: Avoid withdrawing early - let compounding work its magic
Reinvest: Always reinvest dividends and interest for maximum effect
Tax-Advantaged Accounts: Use 401(k), IRA, and similar accounts when possible

Common Investment Vehicles for Compound Growth

Index Funds: Broad market exposure, low fees, historical 7-10% returns
High-Yield Savings: Safe, guaranteed returns, typically 1-5%
Bonds: Moderate risk, steady returns, typically 3-6%
Real Estate: Property appreciation + rental income compounding
Dividend Stocks: Regular income + price appreciation + reinvestment

Important Financial Rules & Tips

📏 Rule of 72

Formula: 72 ÷ Interest Rate = Years to Double

Example: At 6%, money doubles in 12 years

Use: Quick mental math for investment projections

💰 10% Savings Rule

Guideline: Save at least 10% of your income

Better: 20% for early retirement

Best: 50% for financial independence

🎯 4% Withdrawal Rule

Concept: Withdraw 4% annually in retirement

Goal: Make your money last 30+ years

Example: $1M portfolio = $40K/year safely

⏰ Time in Market > Timing Market

Principle: Consistent investing beats trying to time markets

Strategy: Dollar-cost averaging

Benefit: Reduces risk, maximizes compound growth