Compound Interest Calculator

What Is Compound Interest?

Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which is calculated only on the principal amount, compound interest allows your money to grow exponentially over time. This effect is often called "interest on interest" and is one of the most powerful concepts in investing.

How Compound Interest Works

The compound interest formula is: A = P(1 + r/n)^nt, where A is the future value, P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years. When you add regular contributions, the formula extends to include the future value of an annuity.

The Power of Starting Early

The earlier you start investing, the more time compound interest has to work in your favor. Even small, consistent contributions can grow into significant wealth over decades. For example, investing $500 per month at a 7% annual return would grow to over $600,000 in 30 years, with more than half of that coming from compound interest alone.

Compound Frequency Matters

How often interest is compounded affects your returns. Monthly compounding produces slightly higher returns than annual compounding because interest begins earning interest sooner. Most savings accounts compound daily, while many investment returns are calculated monthly or quarterly.

Compound Interest and Dividend Investing

Dividend reinvestment is a practical application of compound interest. When you reinvest your dividends to purchase additional shares, those shares generate their own dividends, creating a compounding effect. Over time, this strategy can significantly accelerate portfolio growth and income generation.