Total Savings: $ 0.00
Total Interest Earned: $
Calculator Use
The compounding calculator is an essential tool for investors and savers looking to project the growth of their wealth over time. Unlike simple interest, compound interest calculates returns on both the initial principal and the accumulated interest from previous periods. This creates a "snowball effect" where your money grows at an accelerating rate.
By entering your starting balance, expected rate of return, and regular contributions, you can visualize how small, consistent investments turn into significant sums over decades.
- Initial Principal
- The starting amount of money you have available to invest or save.
- Annual Interest Rate
- the nominal annual percentage rate (APR) your investment is expected to earn.
- Time Period
- The number of years you plan to leave the money invested.
- Compounding Frequency
- How often interest is calculated and added back to the balance (e.g., monthly, quarterly, or annually).
How It Works
Compound interest is often called the eighth wonder of the world. The mathematical formula used by this compounding calculator is:
A = P(1 + r/n)nt
Where:
- A = Final amount (Future Value)
- P = Principal amount (Initial investment)
- r = Annual interest rate (decimal)
- n = Number of times interest compounds per year
- t = Number of years the money is invested
If you add monthly contributions, the calculator also applies the Future Value of an Ordinary Annuity formula to those deposits, compounding them over the remaining duration of the investment period.
Calculation Example
Example: Suppose you start with $5,000 in a savings account. You plan to contribute $200 every month for 10 years. The account offers a 6% annual interest rate compounded monthly.
Step-by-step solution:
- Initial Principal (P) = $5,000
- Annual Rate (r) = 0.06
- Compounding (n) = 12 times per year
- Years (t) = 10
- Monthly Contribution (PMT) = $200
- FV of Principal = $5,000 * (1 + 0.06/12)120 = $9,096.98
- FV of Contributions = $200 * [((1 + 0.005)120 – 1) / 0.005] = $32,775.87
- Total Future Value = $41,872.85
Common Questions
What is the "Rule of 72"?
The Rule of 72 is a quick way to estimate how long it will take for your money to double with compound interest. Simply divide 72 by your annual interest rate. For example, at a 6% return, your money doubles in approximately 12 years (72 / 6 = 12).
Why does compounding frequency matter?
The more frequently interest is compounded, the higher the final balance will be. Daily compounding results in a slightly higher yield than monthly compounding, which in turn is better than annual compounding. This is why the Annual Percentage Yield (APY) is usually higher than the nominal interest rate.
How do taxes and inflation affect compounding?
While this compounding calculator shows nominal growth, real-world growth is impacted by taxes and inflation. Inflation reduces the purchasing power of your future dollars, while taxes on interest earned can slow down the compounding process unless you are using a tax-advantaged account like a Roth IRA or 401(k).