Compound Interest Calculator
Calculate the future value of your investments with monthly contributions.
How Does This Compound Interest Calculator Work?
Compound interest is often referred to as the "eighth wonder of the world" because of its ability to multiply wealth over time. Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal plus the interest that has accumulated over previous periods.
This calculator uses the standard formula for compound interest with regular monthly additions to provide a realistic projection of your financial future.
The Compound Interest Formula
The calculation for compound interest with monthly contributions is derived from two parts: the future value of the initial lump sum and the future value of a series of monthly payments (an annuity).
Formula: A = P(1 + r/n)^(nt) + PMT × {[(1 + r/n)^(nt) – 1] / (r/n)}
- A: Total amount of money accumulated after n years, including interest.
- P: Principal investment amount (initial deposit).
- PMT: Monthly contribution amount.
- r: Annual interest rate (decimal).
- n: Number of times interest is compounded per unit t.
- t: The time the money is invested for in years.
Example Calculation
Suppose you start with $1,000 and contribute $100 every month for 10 years. If your investment grows at an average annual rate of 7%, compounded monthly:
- Your total contributions would be $13,000 ($1,000 initial + $12,000 monthly).
- Your total interest earned would be approximately $6,308.
- Your final balance would be $19,308.31.
The Importance of Time
The most critical factor in compounding is time. By starting early, even with smaller monthly contributions, you allow the "interest on interest" cycle to run longer, leading to exponential growth in the later stages of your investment term. This is why financial advisors emphasize starting your retirement or savings accounts as soon as possible.