Calculate compound interest and investment growth
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, compound interest grows exponentially over time, making it a powerful tool for building wealth through investments and savings.
A = P(1 + r/n)^(nt) where P = principal, r = annual rate, n = compounds per year, t = years
| Calculation | Expression | Result |
|---|---|---|
| 10-year investment | $10,000 at 7% for 10 years | $19,671.51 |
| Monthly compounding | $5,000 at 5% monthly | $5,255.81/year |
| With contributions | $1,000 + $100/month at 6% | $16,470/10yr |
Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus accumulated interest. For example, $1,000 at 5% for 10 years: Simple = $1,500, Compound (annual) = $1,628.89. The difference grows dramatically over time.
More frequent compounding yields higher returns. $10,000 at 5% for 10 years: Annual compounding = $16,288.95, Monthly = $16,470.09, Daily = $16,486.65. While differences seem small, they become significant with larger amounts and longer periods.
The Rule of 72 estimates how long it takes to double your money. Divide 72 by the annual interest rate. At 6% interest, money doubles in approximately 72 ÷ 6 = 12 years. This is a quick mental math tool for investment planning.
Regular contributions significantly boost compound growth because each addition also earns compound interest. $200/month at 7% for 30 years grows to about $243,000, even though you only contributed $72,000. Starting early with small amounts beats starting late with large amounts.
APR (Annual Percentage Rate) is the simple annual interest rate. APY (Annual Percentage Yield) includes the effect of compounding. APY is always equal to or higher than APR. When comparing accounts, use APY for deposits and APR for loans.
Inflation reduces the real value of your returns. If your investment earns 7% but inflation is 3%, your real return is approximately 4%. Always consider inflation when planning long-term investments. Subtract the inflation rate from your nominal return for a rough real return estimate.