Compound Interest Calculator

Compound interest is one of the most powerful forces in personal finance, yet many people don't fully grasp how it works. Simply put, compound interest is earning interest on your interest.

Here's a basic example: You invest $1,000 and earn 10% interest in the first year, giving you $1,100. In year two, you earn 10% on the full $1,100 (not just your original $1,000), which equals $110 in interest. That extra $10 comes from earning interest on the previous year's interest.

This compounding effect grows exponentially over time. While the quote "Compound interest is the eighth wonder of the world" is often attributed to Albert Einstein, historians have found no evidence he actually said this. The phrase first appeared in 1916 advertising copy. Regardless of its origin, the concept remains incredibly powerful for building wealth.

The mechanics of compound interest are straightforward: interest gets added to your principal balance each compounding period, and future interest calculations include that added amount.

This means you earn returns not just on your original investment, but on all the growth that investment has generated over time. The frequency of compounding - daily, monthly, or annually - affects how quickly your money grows.

You can see an example of how the compound interest effect works on a $1,000 investment below.

Want to quickly estimate how long it takes your money to double? Use the Rule of 72. Simply divide 72 by your annual return rate:

• At 4% returns: 72 ÷ 4 = 18 years to double
• At 6% returns: 72 ÷ 6 = 12 years to double
• At 8% returns: 72 ÷ 8 = 9 years to double

This rule works for any compound interest scenario and helps you understand the power of higher returns over time. A $10,000 investment at 8% becomes $20,000 in 9 years, $40,000 in 18 years, and $80,000 in 27 years, all without adding a single dollar.

The interest rate environment has changed dramatically in recent years. Here's what you can earn on your money today:

• High-Yield Savings Accounts: Up to 5.00% APY (compared to 0.61% national average)
• Certificates of Deposit: 3.70%-4.25% APY depending on term length
• Series I Savings Bonds: 4.03% with inflation protection
• Series EE Savings Bonds: 2.50% fixed rate for 20 years
• Money Market Accounts: Up to 4.25% APY

These rates represent genuine earning power. A $5,000 deposit in a 5% high-yield savings account grows to $8,235 after 10 years through daily compounding alone.

Compound interest impacts nearly every aspect of your financial life, sometimes working for you and sometimes against you.

The standard compound interest formula is:

A = P (1 + [r / n]) ^ nt

Where:

• A = Future value including interest
• P = Principal (initial amount)
• r = Annual interest rate (as a decimal)
• n = Number of compounding periods per year
• t = Number of years

Example: $1,000 at 5% annual interest, compounded monthly for 5 years:

P = $1,000, r = 0.05, n = 12, t = 5 A = $1,000 (1 + 0.05/12) ^ (12×5) = $1,283.36

For compound interest only: Total Interest = A - P = $283.36

Credit cards demonstrate compound interest's destructive power when working against you. With the average credit card APR for accounts assessed interest at 22.83% as of Q3 2025, balances grow exponentially if you only make minimum payments.

Credit card interest compounds daily, meaning your balance increases every single day you carry debt. This daily compounding turns a manageable balance into a financial burden quickly.

Real Example: A $5,000 credit card balance at 22.83% APR with minimum payments takes over 10 years to pay off and costs significantly more in interest than the original balance.

The key to avoiding this trap is paying off credit card balances in full each month, preventing compound interest from working against you.

Time is compound interest's most important ingredient. Starting early beats contributing more money later.

The Twin Example

Twin A invests $500 monthly from age 30 to 67 at 6% annual return: $763,609

Twin B invests $800 monthly from age 40 to 67 at 6% annual return: $611,575

Twin A contributed $222,000 and ended up with $152,034 more, despite investing less money. The 10-year head start made all the difference.

Why This Works: Early contributions have more time to compound. Money invested at age 25 has 40 years to grow before retirement. Money invested at age 45 has only 20 years - half the compounding time.

Compound interest becomes your wealth-building ally when you understand how to harness it:

• Start immediately: Even small amounts compound significantly over decades. Time matters more than timing the market.
• Automate contributions: Set up automatic transfers to investment accounts. Consistent investing amplifies compound growth.
• Reinvest returns: Whether dividends, interest, or capital gains, reinvesting accelerates compounding.
• Choose tax-advantaged accounts: 401(k)s and IRAs let compound growth occur without annual tax drag.
• Eliminate high-interest debt: Credit card interest compounds against you faster than most investments compound for you.

Warren Buffett, whose wealth largely comes from compound interest, said: "My life has been a product of compound interest." Understanding these principles puts you on the path to building substantial wealth over time.

For more information and guides - check out our Investment Hub - where we have many resources to help you choose your investments.