Compound Interest Calculator
Starting investment amount
Yearly interest rate percentage
How often interest is compounded
Duration of investment in years
Return on
Investment
5.1%
Future Value
$1051.16
Total Interest Earned
$51.16
Effective Annual Rate
5.12%
Number of Periods
12
Periodic Rate
0.42%
Value Per Period
$87.60
Understanding Compound Interest and Its Power for Your Finances
Compound Interest is a fundamental concept in finance that can significantly affect your savings and investments over time. It’s the process where interest is calculated on both the initial principal and the accumulated interest from previous periods. This leads to exponential growth, making compound interest one of the most powerful tools for building wealth.
What is Compound Interest?
Unlike simple interest, which is calculated only on the principal amount, compound interest takes into account the interest that has already been added to the principal. In simpler terms, with compound interest, your money earns "interest on interest."
For example, if you invest $1,000 at an interest rate of 5% per year, after the first year, you’ll earn $50 in interest. In the second year, you earn interest on $1,050 (the original principal plus the interest from the first year), which results in $52.50 in interest, and so on. This compounding effect continues over time, causing your investment to grow faster than with simple interest.
Compound Interest Formula
The compound interest formula is:
A = P (1 + r/n)^(nt)
Where:
- A = the amount of money accumulated after n years, including interest
- P = principal amount (the initial money)
- r = annual interest rate (decimal)
- n = number of times interest is compounded per year
- t = time the money is invested for in years
Applications of Compound Interest
Compound interest is widely used in various financial contexts:
- Savings Accounts: Many savings accounts compound interest on a regular basis, leading to faster growth.
- Investments: Stocks, bonds, and mutual funds use compound interest to help investments grow over time.
- Retirement Accounts: Accounts like IRAs or 401(k)s benefit from long-term compounding.
- Loans and Debt: Compound interest can also work against you when it comes to credit card debt and loans.
How to Use a Compound Interest Calculator
A compound interest calculator helps you visualize how your savings or investments will grow. Simply enter the principal amount, interest rate, time frame, and compounding frequency to see the impact of compound interest over time.