Compound Interest Calculator

The Power of Compound Interest

Compound interest has been called the "eighth wonder of the world" for its ability to generate wealth over time. It's one of the most powerful concepts in finance, allowing modest investments to grow significantly over long periods.

How Compound Interest Works

Compound interest works by calculating interest not only on your initial principal but also on the accumulated interest from previous periods. This creates a snowball effect that accelerates your investment growth over time.

Consider two scenarios to understand the difference between simple and compound interest:

• Simple interest: $1,000 at 5% annually for 30 years would earn $1,500 in interest (5% × $1,000 × 30 years).
• Compound interest: The same $1,000 at 5% compounded annually for 30 years would grow to approximately $4,322, earning $3,322 in interest.

Factors Affecting Compound Interest

Several key factors influence how quickly your money grows with compound interest:

• Interest rate: Higher rates lead to faster growth. Even a small increase in rate can make a significant difference over long periods.
• Compounding frequency: More frequent compounding (monthly vs. annually) results in slightly higher returns.
• Time: The most crucial factor. The longer your money compounds, the more dramatic the growth becomes.
• Regular contributions: Adding money regularly supercharges compound interest by providing more principal to earn interest.

The Rule of 72

The Rule of 72 is a simple way to estimate how long it will take for an investment to double at a given interest rate. Divide 72 by the annual interest rate to approximate the doubling time in years.