The Power of Compound Interest
Compound interest is the phenomenon where the interest on your savings earns interest itself. In simple terms, you earn interest on your money, and then you earn interest on that interest. Over time, this creates a "snowball effect," allowing your wealth to grow exponentially rather than linearly.
How It Works
The calculator above allows you to see this effect in real-time. By adjusting the Compound Frequency, you can see how often your money is updated.
- Daily Compounding: Interest is calculated every day. This yields the highest return.
- Monthly Compounding: Common for bank accounts and retirement funds.
- Annually: Interest is calculated once per year.
The Formula
While we handle the complex iterations for monthly contributions automatically, the core formula for compound interest is:
Where:
P = Principal Investment
r = Annual Interest Rate
n = Compounding Frequency
t = Years
Start Early
The most critical factor in compound interest is time. A small amount saved today is often worth more than a large amount saved 10 years from now because of the extra time to compound. Use this tool to experiment with different timeframes and see the impact.