Compound Interest Calculator
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Total Interest Earned: $0.00
Understanding Compound Interest
Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It's often referred to as "interest on interest." This powerful concept means your money grows at an accelerating rate over time, making it a cornerstone of long-term investing and wealth building.
How it Works
Unlike simple interest, which is only calculated on the original principal amount, compound interest takes into account the growing balance. Each time interest is compounded, the new interest earned is added to the principal, forming a larger base for future interest calculations. The more frequently interest is compounded (e.g., daily vs. annually), the faster your investment will grow, assuming the annual rate remains the same.
The Formula
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
The total interest earned is then calculated as: Total Interest = A – P
Example Calculation
Let's say you invest $1,000 (P) at an annual interest rate of 5% (r = 0.05) for 10 years (t). If the interest is compounded quarterly (n = 4):
A = 1000 * (1 + 0.05/4)^(4*10)
A = 1000 * (1 + 0.0125)^40
A = 1000 * (1.0125)^40
A ≈ 1000 * 1.6436
A ≈ $1,643.62
Total Interest Earned = $1,643.62 – $1,000 = $643.62
Our calculator helps you quickly see how different initial investments, interest rates, timeframes, and compounding frequencies can impact your long-term financial growth.