Compound Interest Calculator

Compound interest is often called the "eighth wonder of the world" because of its remarkable ability to grow wealth over time. Unlike simple interest, which is calculated only on the principal, compound interest includes accumulated interest in each period's calculation, creating exponential growth. The power of compounding comes from earning interest on interest. Each compounding period, the principal grows by the earned interest, and subsequent periods calculate interest on this larger amount. Over decades, this creates dramatic differences compared to simple interest. Compounding frequency matters: daily compounding yields more than monthly, which yields more than annual. The formula A = P(1 + r/n)^(nt) shows that more frequent compounding (higher n) results in greater final amounts, though the difference becomes smaller at very high frequencies. For investors, compound interest demonstrates why starting early is crucial. For borrowers, it shows why minimum credit card payments hardly reduce principal—most goes to interest. Understanding compounding is fundamental to financial literacy.

When comparing investment options, always use the same compounding frequency for fair comparison. Remember that higher rates often come with higher risk. For long-term planning, consider inflation-adjusted (real) returns rather than nominal returns. A 10% nominal return with 6% inflation gives only a 4% real return. For tax-advantaged accounts, factor in tax savings when comparing with taxable alternatives.