💰 What is Compound Interest?
Compound interest is often called the "eighth wonder of the world". It is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
Essentially, you earn interest on your interest. Over time, this leads to exponential growth, distinguishing it from "Simple Interest" where you only earn on your principal.
Albert Einstein allegedly said: "Compound interest is the most powerful force in the universe. He who understands it, earns it; he who doesn't, pays it."
🎯 Common Use Cases
🏖️ Retirement Planning
Calculate how much you need to save monthly to reach your retirement goal. Visualize the power of starting early - even $200/month at age 25 can grow to over $500,000 by retirement.
🎓 Education Fund (529 Plans)
Plan for your child's college expenses by seeing how monthly contributions grow over 18 years. A $300/month investment can cover significant tuition costs through compound growth.
🏠 House Down Payment
Determine how long it'll take to save for a down payment. See how different monthly contributions and interest rates affect your timeline to homeownership.
📈 Investment Strategy Comparison
Compare different investment vehicles by adjusting the interest rate. See the difference between conservative bonds (3-4%), index funds (7-10%), or aggressive stocks (10-12%).
🎯 Financial Independence (FIRE)
Calculate your path to Financial Independence, Retire Early. See exactly how aggressive saving and investing can accelerate your timeline to financial freedom.
💳 Debt Payoff vs Investment
Compare the cost of debt (credit cards at 18-25% interest) versus investment returns. Helps you decide whether to pay off debt or invest - usually, high-interest debt comes first.
📝 How to Use the Calculator
- Initial Deposit: The amount you start with today (can be $0 if starting fresh).
- Monthly Contribution: Money you add to the investment every month. Even small amounts compound significantly over time.
- Annual Interest Rate: The expected yearly return. Use 7% for stock market historical average, 3-4% for bonds, 0.5% for savings accounts.
- Years: How long you plan to let the money grow. Time is your most powerful asset in compounding.
- Review the chart: Watch how contributions (blue) vs interest earned (green) grow over time.
📊 Compound Interest Comparison Table
| Starting Age | Monthly | Years | Total Invested | Value at 7% |
|---|---|---|---|---|
| Age 25 | $200 | 40 | $96,000 | $523,000 |
| Age 35 | $200 | 30 | $72,000 | $244,000 |
| Age 45 | $200 | 20 | $48,000 | $104,000 |
| 💡 Starting 10 years earlier more than doubles your final value - that's the power of compound interest! | ||||
💡 Investment Tips & Strategies
⏰ Start Early - Time is Your Biggest Advantage
Starting 10 years earlier is worth more than doubling your monthly contribution later. A 25-year-old investing $200/month will have MORE at 65 than a 35-year-old investing $400/month - even though they contribute the same total amount ($96,000). That's compound interest at work.
💵 Consistency Beats Timing
Don't try to time the market. Regular monthly contributions (dollar-cost averaging) smooth out market volatility and ensure you're always buying - high or low. Missing the market's best 10 days over 30 years can cut your returns in half.
🔄 Reinvest Dividends
Always reinvest dividends and interest payments to maximize compound growth. Taking cash payouts dramatically reduces your long-term returns - those dividends should be earning dividends of their own.
🔢 The Formula Explained
The compound interest formula for regular monthly contributions is:
P = Principal (initial deposit)
r = Interest rate per period (annual ÷ 12)
PMT = Monthly payment/contribution
Our calculator handles all this math automatically, showing you both the growth chart and detailed breakdown of contributions vs interest earned.
🔒 Privacy & Security
This compound interest calculator operates entirely in your browser. Your financial goals, contribution amounts, and investment strategies never leave your device.
❓ Frequently Asked Questions
Does this adjust for inflation? ▼
No, this calculator shows the "nominal" value (what you'll actually see in your account). To account for inflation (historically 2-3% annually), you can subtract that from your expected interest rate. For example, use 4-5% "real" return instead of 7% nominal return to see purchasing power.
Is the interest compounded monthly? ▼
Yes, this tool assumes monthly compounding, which corresponds with making monthly contributions and matches how most investment accounts work. More frequent compounding (daily, monthly) produces slightly higher returns than annual compounding.
What's a realistic interest rate to use? ▼
Historical averages: S&P 500 index funds: ~10% (7% after inflation), Bonds: 3-5%, High-yield savings: 0.5-4%, Balanced portfolio (60/40 stocks/bonds): ~7-8%. Conservative estimates use 6-7% for long-term stock investments. Past performance doesn't guarantee future results.
Can I use this for debt calculation? ▼
Yes! Compound interest works against you with debt. Enter your loan amount as the initial deposit, your interest rate (e.g., 18% for credit cards), and $0 monthly contribution to see how debt grows. Alternatively, add a negative monthly contribution to simulate payments and see how long payoff takes.
Should I include my employer 401(k) match? ▼
Yes! If your employer matches 50% of your contributions up to 6%, and you contribute $500/month, enter $750/month ($500 + $250 match) as your monthly contribution. Employer matches are essentially free money that compounds alongside your contributions.
Does this account for taxes? ▼
No, returns shown are pre-tax. Tax treatment varies: Roth IRA/401(k) grows tax-free, Traditional IRA/401(k) is taxed on withdrawal, Taxable brokerage has annual capital gains taxes. Roth accounts give you the full amount shown; traditional accounts will be reduced by your tax bracket in retirement.
How much should I be saving for retirement? ▼
Financial planners recommend saving 10-15% of gross income starting in your 20s, or 15-20% if you start in your 30s. The "rule of 25" suggests you need 25× your annual expenses saved to retire safely (4% withdrawal rate). Use this calculator to see if your current savings rate meets your retirement goals.
What if returns vary year to year? ▼
This calculator uses an average annual return, which smooths out market volatility. In reality, you might see +30% one year and -20% the next, but over decades, returns tend to average out near historical norms (7-10% for stocks). The calculator provides a reasonable estimate, but actual returns will fluctuate.