What is compound interest?
With simple interest you only earn interest on the money you deposited. With compound interest, the interest is added to your balance, and next time it earns interest too. The effect is small at first and huge over long periods; that is why the green part of the chart grows faster every year.
Compound interest formula
- A = final amount
- P = initial deposit (principal)
- r = annual interest rate as a decimal (5% = 0.05)
- n = number of times interest compounds per year
- t = time in years
Example: $10,000 at 5% compounded yearly for 10 years gives 10,000 × 1.0510 = $16,288.95. With monthly compounding it is $16,470.09. Add $100 a month and the balance reaches about $31,998.
Simple vs compound interest
$10,000 at 8% a year, no extra deposits:
| Years | Simple interest | Compound (yearly) | Difference |
|---|---|---|---|
| 5 | $14,000 | $14,693 | $693 |
| 10 | $18,000 | $21,589 | $3,589 |
| 20 | $26,000 | $46,610 | $20,610 |
| 30 | $34,000 | $100,627 | $66,627 |
The rule of 72
A quick way to estimate how long it takes to double your money: divide 72 by the interest rate. At 6% your money doubles in about 72 ÷ 6 = 12 years; at 9%, in about 8 years. The calculator above shows the exact doubling time for your inputs.
How to make compounding work for you
- Start early. Time is the most powerful input. Move the years slider and watch the interest overtake your deposits.
- Add regularly. Small monthly contributions add up, and each one starts compounding straight away. For mutual fund investing, see the SIP calculator.
- Reinvest interest instead of withdrawing it; withdrawing turns compound interest back into simple interest.
- Watch fees and inflation, which compound against you in exactly the same way.
Frequently asked questions
How do I calculate compound interest?
Use A = P × (1 + r/n)^(n×t). For $5,000 at 6% compounded monthly for 5 years: 5,000 × (1 + 0.06/12)^60 ≈ $6,744.25, so the interest is about $1,744.25.
Does compounding frequency matter much?
It matters a little. $10,000 at 5% for 10 years grows to $16,288.95 with yearly compounding and $16,470.09 with monthly compounding. The rate and the time matter far more.
What is the difference between APR and APY?
APR is the stated yearly rate. APY (or effective annual rate) includes compounding: 5% compounded monthly is an APY of about 5.12%. This calculator shows the effective rate for your settings.
How long does it take to double my money?
Divide 72 by the annual interest rate for a quick estimate (the rule of 72). At 8% a year, money doubles in roughly 9 years.
This calculator is for information only and is not financial advice. Actual returns depend on your bank or investment and may vary.