Compound Interest
See how your investments grow over time with the power of compound interest.
Investment Details
$
$
%
years
▼
Investment Growth
Year 10
Year 20
| Return Rate | Future Value | Interest Earned |
|---|
The Magic of Compound Interest
Compound interest means earning interest on your interest. Unlike simple interest (calculated only on the principal), compound interest grows exponentially over time.
Where A = final amount, P = principal, r = annual rate, n = compounds per year, t = years, PMT = periodic contribution.
The Rule of 72
A quick way to estimate how long it takes to double your money: divide 72 by your annual return rate.
At 7% return, your money doubles in about 10.3 years. At 10%, it doubles in just 7.2 years. This simple rule shows why even small rate differences matter enormously over time.
Keys to Building Wealth
- Start early: Time is your biggest advantage. Starting at 25 vs 35 can mean 2x more at retirement, even with the same contributions.
- Be consistent: Regular monthly contributions add up. $500/month at 7% for 30 years = $567,000 (you only put in $180,000).
- Increase contributions: Raise your contribution 1% each year. Small increases compound dramatically.
- Minimize fees: A 1% fee vs 0.1% fee can cost you 25% of your final balance over 40 years.
Important Considerations
- Returns vary: This calculator assumes constant returns. Real investments fluctuate — stock market averages ~7% after inflation, but individual years range from -30% to +30%.
- Inflation matters: $1 million in 30 years won’t buy what it does today. Consider using “real” returns (nominal rate minus ~3% inflation).
- Taxes: Investment gains may be taxed. Use tax-advantaged accounts (401k, IRA, Roth) when possible.
- Fees compound too: High expense ratios eat into your returns year after year. Choose low-cost index funds.
Frequently Asked Questions
What compounding frequencies are available, and which is best?
The calculator supports daily, monthly, quarterly, and annual compounding. More frequent compounding produces slightly higher returns: $10,000 at 7% for 20 years compounds to about $38,697 annually versus $40,025 daily. The difference narrows as the compounding frequency increases beyond monthly, so monthly compounding is usually a practical approximation for most savings accounts and investment funds.
How do monthly contributions change the outcome?
Regular contributions dramatically accelerate growth because each contribution begins compounding from the day it is added. Starting with $10,000 and adding $500 per month at 7% for 20 years grows to roughly $293,000, compared to $38,700 with no contributions. The calculator uses the future value of an annuity formula to model contributions separately from the principal.
What is the Rule of 72 and how does it relate to this calculator?
The Rule of 72 estimates how many years it takes to double your money: divide 72 by the annual interest rate. At 7%, money roughly doubles every 72/7 ≈ 10.3 years. You can verify this quickly by entering an amount with no contributions and checking when the balance doubles in the year-by-year table.
Does this calculator account for inflation?
No — the calculator projects nominal future value using a fixed annual return rate. To estimate real purchasing power, you can subtract an expected inflation rate (typically 2–3%) from your return rate before entering it. For example, entering 5% instead of 8% gives an inflation-adjusted result.
Is the annual return rate the same as the APY on a bank account?
APY (Annual Percentage Yield) already accounts for compounding within a year, so if you enter APY as your annual rate and select annual compounding, the result is accurate. However, if your bank compounds daily and quotes APY, you would get the same result by entering the APY with any compounding frequency, since APY by definition is the effective annual rate.