Compound Interest Calculator
Understanding Compound Interest
Compound interest is often called the "eighth wonder of the world" because of its powerful ability to grow wealth over time. Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal plus the accumulated interest from previous periods.
Essentially, your money earns money, and then that new money earns even more money. This compounding effect creates an exponential growth curve that accelerates the longer you leave your money invested.
How This Calculator Works
Our Compound Interest Calculator uses the standard financial formula to project the future value of your investments. Here is a breakdown of the inputs:
- Initial Investment: The amount of money you start with today.
- Monthly Contribution: Money you add to the investment at the end of every month.
- Annual Interest Rate: The expected yearly return on your investment (e.g., the stock market historically averages around 7-10% adjusted for inflation).
- Growth Period: The number of years you plan to let the money grow.
The Power of Time
The most critical factor in compound interest is time. Consider this example:
If you invest $5,000 today with a monthly contribution of $200 at an interest rate of 8%:
- After 10 years, you would have approximately $46,000.
- After 20 years, you would have approximately $127,000.
- After 30 years, you would have approximately $300,000.
Notice that while the time period tripled (from 10 to 30 years), the total value increased by nearly 6.5 times. This illustrates why starting early is the best strategy for building wealth.
Frequency of Compounding
This calculator assumes monthly compounding, which is standard for most savings accounts and investment projections involving monthly contributions. This means the interest is calculated and added to your balance 12 times a year, maximizing the growth potential compared to annual compounding.