Compound Interest
The Power of Compound Interest
Learn how your money can grow over time with the eighth wonder of the world
What is Compound Interest?
Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Unlike simple interest, which is calculated only on the principal amount, compound interest allows your investment to grow at an accelerating rate over time.
Albert Einstein famously called compound interest "the eighth wonder of the world" and said "He who understands it, earns it; he who doesn't, pays it."
Compound Interest Calculator
Use this calculator to see how your investments can grow with compound interest.
Results
Final Balance
Total Contributions
Interest Earned
The Compound Interest Formula
The formula for compound interest is:
A = P(1 + r/n)^(nt) + PMT * (((1 + r/n)^(nt) - 1) / (r/n))
Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (the initial deposit or loan amount)
- PMT = the monthly payment (additional contribution)
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per year
- t = the number of years the money is invested or borrowed for
Examples of Compound Interest
Example 1: Early Investing
Sarah invests $5,000 annually from age 25 to 35 (10 years) then stops contributing. With an 8% annual return, by age 65 she would have about $787,000.
John starts investing at age 35 and invests $5,000 annually for 30 years until age 65. With the same 8% return, he would have about $611,000.
Even though John invested three times as much money ($150,000 vs $50,000), Sarah ends up with more money because her investments had more time to compound.
Comparison: Compound Interest vs Simple Interest
| Year | Simple Interest ($10,000 at 5%) |
Compound Interest ($10,000 at 5% compounded annually) |
|---|---|---|
| 1 | $10,500.00 | $10,500.00 |
| 5 | $12,500.00 | $12,762.82 |
| 10 | $15,000.00 | $16,288.95 |
| 20 | $20,000.00 | $26,532.98 |
| 30 | $25,000.00 | $43,219.42 |