Compound Interest Calculator
Compound interest is the most powerful force in personal finance: your money earns returns, and those returns earn more returns. For example, $10,000 invested at 7% annual interest for 20 years with monthly compounding grows to $40,387.39 — without adding a single extra dollar. If you also contribute $200 per month, your final balance reaches $144,962.71, of which $96,575.32 is pure interest. This calculator shows you exactly how your investment grows year by year.
Frequently Asked Questions
What is compound interest?
Compound interest is interest calculated on the initial principal plus accumulated interest from previous periods. Unlike simple interest (calculated only on the principal), compound interest makes your money grow exponentially. Albert Einstein supposedly called it 'the eighth wonder of the world'.
What is the difference between monthly and annual compounding?
Compounding frequency determines how often interest is added to the principal. With monthly compounding, interest is reinvested 12 times per year, generating interest on interest more frequently. For example, $10,000 at 7% annual interest over 10 years yields $19,671.51 with monthly compounding vs $19,671.51 with annual compounding — the difference is small but grows significantly over longer periods.
How much should I invest to reach one million dollars?
It depends on your rate of return and time horizon. At a 7% annual return with monthly compounding, you would need to contribute approximately $2,417 per month for 20 years to accumulate $1,000,000. With an initial investment of $100,000, the required monthly contribution drops to $1,551. Use the calculator to simulate your specific scenario.
How does inflation affect compound interest?
Inflation reduces the purchasing power of your money. If your investment yields 7% annually but inflation is 4%, your real return is approximately 3%. For more accurate calculations, subtract the expected inflation rate from the interest rate you enter in the calculator. This gives you an estimate of growth in terms of real purchasing power.
What is the compound interest formula?
The basic formula is A = P × (1 + r/n)^(nt), where P is the principal, r is the annual interest rate (as a decimal), n is the number of compounding periods per year, and t is the number of years. For periodic contributions, add: FV = PMT × [((1 + r/n)^(nt) - 1) / (r/n)]. The final balance is the sum of both formulas.