Compound Interest
Simulate investments and loans with compound interest.
| Year | Amount | Invested | Interest |
|---|---|---|---|
| 1 | $11,268.25 | $10,000.00 | $1,268.25 |
| 2 | $12,697.35 | $10,000.00 | $2,697.35 |
What is compound interest
With compound interest, each period's return is added to the total balance instead of just the initial amount — "interest on interest". This is the model used in most investments (savings accounts, CDs, bonds, funds) and also in loans and credit card balances, which is why unpaid debt under this regime grows so quickly.
The basic formula is A = P × (1 + r)^t, where P is the principal, r is the interest rate per period, and t is the number of periods. When there are monthly contributions, the calculation adds the growth of each new contribution over its remaining time, making the effect even more pronounced over long periods.
Why time matters so much
The effect of compound interest is modest in the short term but becomes pronounced as time increases, because each period compounds on a larger base. That is why long-term investments (retirement, savings for children) disproportionately benefit from starting early, even with smaller contributions.
Frequently asked questions
What is the difference between simple and compound interest?
With simple interest, the return is always based on the initial principal. With compound interest, the return is based on the accumulated balance (principal + previous interest), generating exponential growth over time.
Do monthly contributions make a big difference?
Yes. Recurring contributions, even small ones, significantly increase the final amount because each new contribution also earns compound interest for its remaining time in the simulation.
Does this calculator account for inflation or taxes?
No. The calculation is based on the nominal interest rate entered. For a real return projection, you need to subtract inflation for the period and, where applicable, income tax on the return.
Can I use this calculator to simulate a loan?
Yes, the same compound interest principle applies to loans. Just use the rate charged by the lender and the contract term to estimate the total paid.