Compound interest is the interest earned on both the initial principal and the accumulated interest from previous periods. It's often described as "interest on interest" and is a powerful force in growing wealth over time, making it a cornerstone of long-term investing and savings strategies. Unlike simple interest, which is calculated only on the principal amount, compound interest allows your money to grow at an accelerating rate.
The Compound Interest Formula
The most common formula used to calculate compound interest is:
A = P (1 + r/n)^(nt)
Where:
A is the future value of the investment/loan, including interest
P is the principal amount (the initial amount of money)
r is the annual interest rate (as a decimal)
n is the number of times that interest is compounded per year
t is the time the money is invested or borrowed for, in years
To calculate the total compound interest earned, you subtract the principal amount from the future value:
Compound Interest = A – P
How the Calculator Works
Our calculator takes your initial deposit (Principal), the annual interest rate, the number of years you plan to invest, and how often the interest is compounded (Annually, Monthly, Daily, etc.). It then applies the compound interest formula to project the future value of your investment.
Initial Deposit (Principal): The starting amount you invest.
Annual Interest Rate: The percentage gain your investment is expected to make each year.
Time (Years): The duration for which your money will be invested.
Compounding Frequency: Determines how often interest is calculated and added to the principal. More frequent compounding (e.g., daily) generally leads to slightly higher returns than less frequent compounding (e.g., annually) at the same annual rate.
Why Compound Interest Matters
The "magic" of compounding becomes more apparent the longer your money is invested. Even small differences in interest rates or compounding frequencies can lead to significant variations in your final returns over decades. It's a vital concept for:
Retirement Planning: Saving early and letting compound interest work its magic is key to a comfortable retirement.
Investment Growth: Understanding how your investments grow through compounding helps in setting realistic expectations and making informed decisions.
Debt Management: Conversely, compound interest can work against you with high-interest debts like credit cards. Paying down debt aggressively minimizes the impact of compounding interest on your liabilities.
Use this calculator to explore different scenarios and see the potential of compound interest for your financial goals.
function calculateCompoundInterest() {
var principal = parseFloat(document.getElementById("principal").value);
var annualRate = parseFloat(document.getElementById("annualRate").value);
var time = parseFloat(document.getElementById("time").value);
var compoundingFrequency = parseInt(document.getElementById("compoundingFrequency").value);
var resultDiv = document.getElementById("result");
// Input validation
if (isNaN(principal) || principal <= 0 ||
isNaN(annualRate) || annualRate < 0 ||
isNaN(time) || time <= 0 ||
isNaN(compoundingFrequency) || compoundingFrequency <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
var ratePerPeriod = annualRate / 100 / compoundingFrequency;
var numberOfPeriods = compoundingFrequency * time;
// A = P (1 + r/n)^(nt)
var futureValue = principal * Math.pow((1 + ratePerPeriod), numberOfPeriods);
var totalInterestEarned = futureValue – principal;
// Format numbers for better readability
var formattedFutureValue = futureValue.toLocaleString(undefined, { style: 'currency', currency: 'USD' });
var formattedTotalInterestEarned = totalInterestEarned.toLocaleString(undefined, { style: 'currency', currency: 'USD' });
resultDiv.innerHTML = "" +
formattedFutureValue +
"Total Interest Earned: " + formattedTotalInterestEarned + "";
}