Compound Interest Calculator
The Magic of Compound Interest
Albert Einstein allegedly called compound interest the "eighth wonder of the world". But how does it work in practice?
Unlike simple interest (where the yield is always on the initial amount), in compound interest you earn interest on the interest you've already earned. This creates an exponential growth curve that rewards patience and consistency.
The Secret of the Long Term
At the beginning of your investment, your effort (monthly contributions) is what makes the wealth grow the most. However, over the years, the snowball grows so large that the amount your account yields in interest monthly becomes much larger than the money you take out of your own pocket.
Worked example
$5,000 upfront and $500 a month, at 10% a year, for 10 years: you invest $65,000 and end with $112,900.64. Interest accounts for $47,900.64. Without the monthly contributions, the $5,000 would grow to $12,968.71.
The formula
With monthly contributions, the calculator applies interest month by month to the balance and adds the contribution at the end of each month. An annual rate is converted to monthly on a compound basis: 10% a year is 0.80% a month.
Rule of 72
To estimate how many years it takes to double your money, divide 72 by the annual rate: at 10% a year, about 7.2 years. It is an approximation, most accurate for moderate rates.
Frequently asked questions
Does the result include income tax?
No, it is a gross figure. Taxes on investment income reduce the final amount, depending on where you live and the type of investment.
Which rate should I use?
The return you expect from the investment. To see future purchasing power, use a rate that already subtracts expected inflation.
How is it different from simple interest?
With simple interest, you always earn on the initial amount. With compound interest, each month's interest also earns interest, and the gap grows over time.