What Is Compound Interest?

Compound interest is the interest you earn on both your initial principal and the accumulated interest from previous periods. You can think of it as "interest on interest". It makes a sum of money grow at a faster rate than simple interest which is calculated only on the principal amount. This snowballing effect is what makes compound interest a very useful tool for long term wealth creation.

How to Use This Calculator

This tool helps you visualize how your money can grow. Provide the following details to see a projection:

• Initial Principal Amount: The starting amount of money for your investment.
• Monthly Contribution: Any additional amount you plan to add to the principal on a monthly basis. Set this to zero if you have no regular contributions.
• Annual Interest Rate: The expected nominal annual interest rate for your investment.
• Time Period in Years: The total number of years you plan to let the investment grow.
• Compounding Frequency: How often the interest is calculated and added to the principal. More frequent compounding leads to slightly higher returns.

Understanding the Formula

The calculation for compound interest is based on a standard formula. The future value of an investment is determined by a few key variables. The formula for the principal amount is as follows:

A = P (1 + r/n)^nt

Here is a breakdown of the variables in the formula:

• A is the future value of the investment including interest.
• P is the principal investment amount which is the initial deposit or loan amount.
• r is the annual interest rate in decimal form.
• n is the number of times that interest is compounded per year.
• t is the number of years the money is invested or borrowed for.

When you include regular monthly contributions an additional formula is used to calculate the future value of that series of payments. Our calculator combines both calculations to give you a total future value.

The Importance of Time and Consistency

The results from the calculator demonstrate a key principle of investing. Time is one of your greatest assets. The longer your money is invested the more time it has to benefit from the effects of compounding. Even small regular contributions can grow into a large sum over several decades. This is why financial experts often advise starting to save for long term goals like retirement as early as possible.

Disclaimer: This calculator is for illustrative purposes only and the results are not a guarantee of future performance. Actual returns may vary. It is always a good idea to consult with a financial professional for personalized advice.