What is the difference between compound and simple interest?

Simple interest is calculated only on the original principal amount (I = P x R x T). Compound interest is calculated on the principal plus any previously earned interest. Over time, compound interest results in significantly higher returns because each interest payment adds to the base that earns future interest.

What is the Rule of 72?

The Rule of 72 is a quick estimation method to determine how long it takes for an investment to double in value. Simply divide 72 by the annual interest rate. For example, at 8% annual interest, your money would approximately double in 72 / 8 = 9 years. This rule works best for rates between 6% and 10%.

Which compounding frequency is best?

More frequent compounding results in slightly higher returns. Daily compounding yields more than monthly, which yields more than quarterly, which yields more than annually. However, the difference between daily and monthly compounding is usually small. The most important factors for growth are the interest rate, principal amount, and time invested.

Compound Interest Calculator

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Annual Interest Rate (%)

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How Compound Interest Works

Compound interest is one of the most powerful concepts in finance. Unlike simple interest, which is calculated only on the original principal, compound interest is calculated on the principal plus all previously accumulated interest. This means your money earns interest on its interest, creating exponential growth over time.

The compound interest formula is A = P(1 + r/n)^nt, where A is the future value, P is the principal, r is the annual interest rate (decimal), n is the number of times interest compounds per year, and t is the number of years. When you add regular monthly contributions, each deposit also earns compound interest from the date it is added.

The frequency of compounding matters, though the effect is often smaller than people expect. Daily compounding yields slightly more than monthly, which yields slightly more than annually. The real drivers of growth are time and the interest rate. Starting early is by far the most effective strategy because it gives compounding more time to work. A useful shortcut is the Rule of 72: divide 72 by your annual rate to estimate how many years it takes your money to double. At 8%, your investment doubles roughly every nine years. Use this calculator to model different scenarios and see how adjusting the principal, rate, frequency, or time period affects your future wealth.

Formula

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

Where:

A = final amount (principal + interest)
P = initial principal
r = annual interest rate (as a decimal)
n = number of compounding periods per year
t = number of years

Example Calculation

Scenario: $10,000 invested at 7% annual interest, compounded monthly, for 10 years

Step 1: r/n = 0.07 / 12 = 0.005833
Step 2: nt = 12 × 10 = 120 compounding periods
Step 3: A = $10,000 × (1.005833)¹²⁰
Result: A = $20,096.61 | Interest earned = $10,096.61

Disclaimer: This calculator is for informational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified professional for decisions specific to your situation.

Compound Interest Calculator

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