Compound Interest Calculator

Compound interest earns interest on both principal and previously earned interest (exponential growth), while simple interest only earns on original principal (linear growth). Example: $1,000 at 5% for 3 years. Simple interest: Year 1-3 each earn $50 on original $1,000, total $150 interest, ending at $1,150. Compound interest: Year 1 earns $50, Year 2 earns $52.50 on $1,050 balance, Year 3 earns $55.13 on $1,102.50 balance, total $157.63 interest, ending at $1,157.63. Over 3 years, compound earned only $7.63 more (5% difference), but over 30 years the difference is dramatic: simple interest yields $2,500 (2.5× money), compound yields $4,322 (4.3× money)—compound earns 2.2× more. Real-world: compound interest universal in modern finance (savings, investments, loans, credit cards). Simple interest rare. Compound power: early interest becomes principal, earns its own interest, creating snowball effect. Einstein allegedly called it "eighth wonder of the world." Works both ways: accelerates investment growth (beneficial) and debt accumulation (costly—credit card debt compounds against you). Key insight: compound grows exponentially with patience and time, starting early allows many compounding cycles.

More frequent compounding produces slightly higher returns because interest is calculated and added to principal more often. $10,000 at 6% for 10 years: Annual compounding = $17,908. Monthly compounding = $18,194 (+$286, +1.6% more). Daily compounding = $18,221 (+$313, +1.7% more than annual). Continuous = $18,221 (essentially same as daily). Observations: frequency matters but effect is modest—monthly versus annual differs by 1.6%, but monthly versus daily only 0.15%. Why modest: more frequent compounding approaches mathematical limit (continuous compounding). Gains diminish beyond monthly. At higher rates and longer timeframes, differences magnify: $10,000 at 10% for 30 years shows monthly beats annual by $25,000 (14% more), but monthly versus daily still only $1,648 difference. Practical advice: choose more frequent compounding when available (free extra returns), but don't sacrifice higher rate for better compounding—6% annual beats 5.9% monthly. Compare APY (Annual Percentage Yield) which accounts for compounding: 6% monthly = 6.17% APY, 6% daily = 6.18% APY. Bottom line: compounding frequency matters, but interest rate and time are far more important factors.

Start as early as possible—even small amounts invested young dramatically outperform larger amounts invested later due to exponential compound growth over decades. Classic example: Age 25 investor contributes $5,000/year for 10 years (ages 25-34), totaling $50,000, then stops—never contributes again. Let compound at 8% until age 65. Result: $590,000. Age 35 investor contributes $5,000/year for 30 years (ages 35-64), totaling $150,000—three times more contributions. Same 8% return until age 65. Result: $566,000. Early starter ends with more money despite contributing $100,000 less and stopping after 10 years. Those early years (ages 25-35) compounding for full 40 years created more wealth than 30 years of contributions starting later. Single investment example: $5,000 invested at age 20 grows to $156,000 by age 65 (45 years at 8%). Same $5,000 invested at age 40 grows to only $34,000 by age 65 (25 years)—starting 20 years earlier yields 4.6× more from same investment. Math: compound growth is exponential A = P(1 + r)^t. As time increases, growth accelerates: 10 years doubles money, 20 years quadruples, 30 years increases 10-fold, 40 years increases 20-fold at 8%. Practical advice: start immediately with whatever amount possible, even $50/month compounds significantly over decades. Waiting for "enough money" costs exponentially more in lost compound time. Best time to start was 20 years ago, second-best time is now.

Use conservative, realistic rates based on asset class: 7-8% for stock-heavy portfolios, 5-6% for balanced portfolios, 3-4% for conservative/bond-heavy portfolios. Historical context: Stock market (S&P 500) averaged ~10% annually (1926-present) nominal, ~7% real (inflation-adjusted). However, returns vary dramatically year-to-year (-30% to +30%). For planning, 8-10% reasonable for aggressive long-term stock portfolio, but 7-8% more conservative accounting for potential lower future returns and inflation. Bonds historically ~5-6% annually, currently 4-5% (2024). Balanced portfolio (60% stocks/40% bonds) averages ~7-8% (weighted: 60%×10% + 40%×5% = 8%). For retirement planning, use 6-7% balanced assumption. Savings accounts: traditional banks 0.5-1%, high-yield online 4-5% (varies with Fed rates). For emergency funds, 3-5% realistic. Inflation adjustment critical: subtract 2-3% annual inflation from nominal returns to get real purchasing power growth. Age-based adjustments: younger investors (20s-30s) use 8-10% with long timeline and higher risk tolerance; middle-age (40s-50s) use 6-8% approaching retirement; near-retirees (60+) use 4-6% with capital preservation priority. Account for fees: mutual fund expenses (0.5-1%), advisor fees (1%), transaction costs reduce returns by 0.5-1.5%. If assuming 8% gross, use 6.5-7.5% net. Recommendation: err on conservative side—better to exceed expectations than fall short in retirement. Avoid exaggerated 12%+ projections. Recalculate periodically with actual returns and adjust contributions if behind targets. Reality: returns unpredictable short-term but historically positive long-term with diversification.

Compare debt interest rate versus expected investment return—generally pay off debt above 6-7% first, invest rather than prepaying debt below 4% if comfortable with risk. High-interest debt (credit cards 15-25% APR): Paying off 18% debt provides guaranteed 18% "return" by avoiding interest charges. No investment consistently beats 18% without extreme risk. Clear answer: eliminate high-interest debt before investing (exception: always take employer 401k match first—free money). $10,000 credit card debt at 18% with minimum payments takes 7.8 years, costs $8,700 interest, total paid $18,700. Paying off immediately saves $8,700—better than uncertain market returns. Medium-interest debt (personal loans, student loans 4-8%): Gray area depending on specific rate. 5-6% student loans could be paid slowly while investing at potential 8-10% returns, but debt payoff provides guaranteed return, frees cash flow, and offers psychological relief. Personal decision based on risk tolerance and circumstances. Low-interest debt (mortgage 3-4%): Historical stock returns (8-10%) significantly exceed low debt costs. $10,000 mortgage prepayment at 3.5% saves ~$7,000 interest over 30-year loan. Same $10,000 invested at 8% for 30 years grows to ~$100,000. Investing returns $93,000 more mathematically. However, consider: guaranteed return versus market risk, liquidity of investments versus locked home equity, psychological value of debt-free status, tax deductions reducing effective mortgage rate. Employer match exception: Always contribute enough to get full 401k match (often 50-100% instant return) before extra debt payments—even high-interest debt. Recommended sequence: (1) Get employer match, (2) Pay high-interest debt (>10%), (3) Build emergency fund, (4) Pay medium debt or invest (based on rates/preferences), (5) Invest additional funds, (6) Consider prepaying low-interest debt versus investing. Balanced approach maximizes compound interest working for you rather than against you.