What is compound interest?
Compound interest is interest calculated not only on the money you invest, but also on the interest that money has already earned. In other words, interest is reinvested and starts earning interest of its own: the famous “interest on interest” or snowball effect.
With simple interest, on the other hand, interest is always calculated on the original principal and is never reinvested. The difference looks small at first, but it becomes huge over the years, because compound growth is exponential.
The compound interest formula
For a lump sum with no additional contributions, the formula is:
A = P × (1 + r / n)n × t
- A: final amount.
- P: principal (initial investment).
- r: nominal annual interest rate as a decimal (7% = 0.07).
- n: number of times interest is compounded per year (12 for monthly).
- t: number of years.
If you also make regular contributions of C, each contribution grows with compound interest too. Its future value is added using the annuity formula: C × [(1 + i)N − 1] / i, where i is the interest rate per period and N is the total number of contributions. Our calculator does all of this for you, period by period.
Example: simple vs. compound interest
Imagine you invest $10,000 at 7% a year with no further contributions. This is how your money grows under each type of interest:
| Years | Simple interest | Compound interest (annual) |
|---|---|---|
| 5 | $13,500.00 | $14,025.52 |
| 10 | $17,000.00 | $19,671.51 |
| 20 | $24,000.00 | $38,696.84 |
| 30 | $31,000.00 | $76,122.55 |
After 30 years, compound interest produces more than twice as much as simple interest with the same principal and the same rate. Time is the most powerful ingredient.
How to use the compound interest calculator
- Choose the currency: dollars ($) or euros (€). It only changes how numbers are displayed; no conversion is applied.
- Enter your initial investment: the amount you start with. It can be 0 if you only plan to make contributions.
- Add a regular contribution (optional) and choose whether it is monthly, quarterly or annual.
- Enter the annual interest rate you expect and the time period in years.
- Select the compounding frequency: how often interest is added to the balance (annually, semi-annually, quarterly, monthly, weekly or daily).
- Under Advanced options you can choose whether contributions are made at the start or end of each period and enter an expected inflation rate to see the real value of your money.
The result updates automatically as you type. You will see your final balance, how much you contributed, how much interest you earned, a growth chart and a year-by-year table you can download as CSV or print.
How to read the results
In the chart, the blue part of each bar is the money you put in (initial investment plus contributions) and the green part is the accumulated interest. Over time the green part grows faster and faster: that is the visual signature of compound interest. If you entered an inflation rate, the real value tells you what your final balance would be worth in today's money.
Contributions made between two compounding dates grow at the equivalent periodic rate, so the initial investment grows exactly according to the compound interest formula. Calculations do not include taxes or fees.
Tips to make the most of compound interest
- Start as early as possible. A few extra years can be worth more than doubling your contributions.
- Be consistent. Regular contributions, even small ones, keep the snowball rolling.
- Reinvest your returns. If you withdraw the interest, the compounding effect disappears.
- Watch your fees. A 1% annual fee significantly reduces your final balance over the long run.
- Keep inflation in mind. What really matters is your real return, after inflation and taxes.
- Use the Rule of 72. Divide 72 by the interest rate to estimate how many years it takes for your money to double: at 7%, about 10 years.