Compound Interest Calculator
About Compound Interest
Interest is the compensation paid by a borrower to a lender for the use of money. The concept of interest is the backbone behind most financial instruments in the world. This calculator focuses on compound interest, where interest is added to the principal, so that from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.
Simple vs. Compound Interest
Simple interest is calculated only on the principal amount of a loan. The formula is `Interest = Principal × Rate × Time`.
Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods. This can be thought of as "interest on interest," and will make a deposit or loan grow at a faster rate than simple interest.
The Rule of 72
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. It states that `Years to Double ≈ 72 / Interest Rate`. For example, at an 8% annual interest rate, it would take approximately 9 years to double your money (72 / 8 = 9).
Frequently Asked Questions (FAQ)
How does compounding frequency affect my returns?
The more frequently interest is compounded, the higher the amount of interest earned. Compounding daily will earn more than compounding annually because you begin earning interest on your interest sooner.
How do contributions work?
This calculator allows you to add periodic deposits (contributions). This is useful for simulating a savings plan where you consistently add money to your investment over time, which significantly accelerates the power of compounding.