Compound interest is often called "interest on interest." It's a powerful concept that describes how an investment or savings account grows over time when the earned interest is added to the principal amount, and then the new total earns interest. This exponential growth makes it a cornerstone of long-term investing and wealth building.
The formula for compound interest is:
A = P (1 + r/n)^(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 (as a decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
Essentially, the more frequently your interest compounds (higher 'n'), and the longer your money is invested (higher 't'), the faster your money will grow. Even small differences in interest rates or compounding frequency can lead to significant differences in the final amount over extended periods.
How the Calculator Works
Our compound interest calculator helps you visualize this growth. You input:
Initial Investment: The starting amount of money you're investing.
Annual Interest Rate: The percentage rate your investment is expected to grow each year.
Number of Years: The duration for which you plan to keep the investment.
Compounding Frequency: How often the interest is calculated and added to the principal within a year (e.g., annually, monthly).
The calculator then uses the compound interest formula to project the total value of your investment after the specified period, including all the compounded interest.
Example Calculation
Let's say you invest $5,000 (P) at an annual interest rate of 7% (r = 0.07) for 20 years (t). If the interest is compounded monthly (n = 12):
A = 5000 * (1 + 0.07/12)^(12*20)
A = 5000 * (1 + 0.0058333)^(240)
A = 5000 * (1.0058333)^(240)
A = 5000 * 4.03449
A ≈ $20,172.45
In this scenario, your initial $5,000 would grow to approximately $20,172.45 after 20 years, with over $15,000 being earned in interest!