Compound Interest Calculator

Simple interest is only calculated on the original principal amount you invest or borrow. For example, if you invest $1,000 at 5% simple interest for 3 years, you earn $50 each year, totaling $150. Compound interest is calculated on the principal plus the interest that has already accumulated. In year one, you earn $50. In year two, you earn 5% on $1,050 ($52.50). In year three, you earn 5% on $1,102.50 ($55.13), totaling $157.63. Over time, compound interest grows significantly faster than simple interest.

APR stands for Annual Percentage Rate and represents the simple interest rate charged or earned over a year, excluding compounding. APY stands for Annual Percentage Yield and represents the true annual rate of return, taking into account the effects of compounding interest. Because APY factors in compounding, the APY is always higher than the APR. When comparing savings accounts, you should look at the APY to see the true growth rate.

Compounding frequency determines how often interest is calculated and added to your balance. The most common frequencies are daily, monthly, quarterly, and annually. The more frequently interest compounds, the faster your money grows because your interest begins earning interest sooner. For example, $10,000 at 6% interest compounded daily will grow to $10,618.31 after one year, compared to $10,616.78 with monthly compounding and $10,600.00 with annual compounding.

The Rule of 72 is a quick, mental shortcut used to estimate how many years it will take for an investment to double in value at a fixed rate of return. To use it, divide 72 by your expected annual interest rate. For example, if your portfolio averages an 8% annual return, it will take approximately 9 years to double your money (72 / 8 = 9). If your rate of return is 6%, it will take approximately 12 years to double (72 / 6 = 12).

If your money is in a guaranteed savings account (like an FDIC-insured High-Yield Savings Account or a Certificate of Deposit), your principal is protected and your balance will only grow. However, if your compound interest projections are based on stock market investments (like mutual funds or ETFs), the value of your portfolio will fluctuate with market conditions. While the stock market has historically averaged 10% annual returns over long periods, you can lose money in the short term during market downturns.

Inflation raises consumer prices, which erodes the purchasing power of your savings. If your investment earns 5% interest but inflation is 3%, your 'real' rate of return is only 2%. While your balance grows by 5% on paper, your actual buying power only increases by 2%. When running long-term compound interest projections, it is a best practice to subtract estimated inflation from your expected interest rate to see results in today's dollars.

For short-term savings (under 5 years), the best accounts are FDIC-insured High-Yield Savings Accounts (HYSAs) or Certificates of Deposit (CDs), which currently offer competitive yields with zero risk. For long-term wealth building (over 5 years, such as retirement), investing in broad-market stock index funds through tax-advantaged accounts like a 401(k) or Roth IRA provides the highest potential returns and protects your growth from taxes.

Yes, compound interest works in both directions. While it builds wealth when you invest, it can lead to financial distress when you borrow. Credit card companies calculate interest daily and compound it monthly on your outstanding balances. If you only pay the minimum balance, the unpaid interest compounds, causing your debt to grow rapidly. This is why avoiding high-interest debt is a critical first step in personal finance.

The basic formula for compound interest is A = P(1 + r/n)^(nt), where A is the final balance, P is the initial principal, r is the annual interest rate, n is the compounding frequency per year, and t is the number of years. If you add monthly contributions, the formula is expanded to include the future value of an annuity: PMT * [((1 + r/n)^(nt) - 1) / (r/n)], where PMT is the monthly contribution.

Yes, in the United States, interest earned on savings accounts, money market accounts, and certificates of deposit is taxed as ordinary income. Your bank will send you Form 1099-INT at the end of the year detailing your interest earnings, which you must report on your tax return. To protect your interest earnings from taxes, you can invest through tax-sheltered accounts like Traditional or Roth IRAs.