Compound Interest Calculator
Discover the power of compound interest - "the eighth wonder of the world." Calculate how your money grows when earnings generate their own earnings over time.
Compound Interest Calculation
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Compound Interest Formula
Compounding Examples:
- Daily: Interest calculated 365 times per year
- Monthly: Interest calculated 12 times per year
- Quarterly: Interest calculated 4 times per year
- Annually: Interest calculated once per year
Understanding Compound Interest
Compound interest is the interest calculated on the initial principal and the accumulated interest from previous periods.
- Simple Interest: Interest earned only on the original principal
- Compound Interest: Interest earned on principal plus previously earned interest
- Compounding Effect: The more frequent the compounding, the greater the final amount
- Time Factor: The longer the time period, the more dramatic the compounding effect
The Rule of 72
A quick way to estimate how long it takes for an investment to double with compound interest:
Examples:
- At 6% interest: 72 ÷ 6 = 12 years to double
- At 8% interest: 72 ÷ 8 = 9 years to double
- At 12% interest: 72 ÷ 12 = 6 years to double
Compounding Frequency Impact
The frequency of compounding can significantly affect your returns:
- Daily Compounding: Highest returns, minimal effort difference from continuous
- Monthly Compounding: Very good returns, common for savings accounts
- Quarterly Compounding: Good returns, common for CDs and bonds
- Annual Compounding: Lowest compound returns, but still better than simple interest
Note: The difference between daily and annual compounding decreases as interest rates get lower.
Compound Interest FAQs
What's the difference between APR and APY?
APR is the annual percentage rate without compounding. APY (Annual Percentage Yield) includes the effect of compounding and shows the true annual return.
How often should interest be compounded?
More frequent compounding is always better for the investor. Daily compounding offers the highest returns.
Does compound interest work for debt too?
Yes, compound interest works against you with debt. Credit card debt compounds, making it grow faster if not paid off quickly.