Understanding Compound Interest

Compound interest is the interest you earn on both your original investment and the accumulated interest from previous periods. Often called "interest on interest," it can significantly accelerate the growth of your savings over time. Our calculator helps you visualize this powerful financial concept.

The Compound Interest Formula

The future value of an investment with periodic contributions is calculated using a combination of formulas. The core formula for a lump sum is:

Where:

• A = the future value of the investment/loan, including interest
• P = the principal investment amount (the initial deposit)
• r = the annual interest rate (in decimal)
• n = the number of times that interest is compounded per year
• t = the number of years the money is invested for

Our calculator also factors in the future value of your regular monthly contributions to give you a complete picture of your investment's potential.

Frequently Asked Questions (FAQ)

How is compound interest different from simple interest?

Simple interest is calculated only on the initial principal amount. In contrast, compound interest is calculated on the principal plus any interest that has already been earned. This reinvestment of earnings is what leads to exponential growth over the long term.

How does compounding frequency affect my returns?

The more frequently interest is compounded, the faster your investment will grow. For example, an investment with interest compounded daily will earn slightly more than the same investment with interest compounded annually. This is because interest starts earning its own interest sooner.

Why is it so important to start investing early?

Starting early gives your money more time to grow through the power of compounding. Even small, regular investments can grow into a substantial sum over several decades. The longer your investment horizon, the more significant the effect of compounding becomes.