What is compound interest?
Compound interest is interest earned on interest. In year one you earn interest on your deposit; in year two you earn interest on the deposit plus the interest from year one — and so on. This snowball effect is why starting early matters more than starting big.
- A — final balance
- P — starting principal
- r — annual rate (as a decimal)
- n — compounding periods per year
- t — years invested
The power of starting early
Consider two savers who both earn 7% annually. Person A invests $250/month from age 25 to 35 and then stops. Person B invests $250/month from age 35 all the way to 65. At retirement, Person A ends up with more money — despite contributing for only 10 years versus 30 — because their earlier contributions had three extra decades to compound.
The Rule of 72
A quick mental shortcut: divide 72 by your annual return to estimate how many years your money takes to double.
| Annual return | Years to double |
|---|---|
| 4% | ~18 years |
| 6% | ~12 years |
| 8% | ~9 years |
| 10% | ~7.2 years |
Frequently asked questions
What is compound interest?
Interest earned on both your original deposit and previously earned interest. The balance grows on itself, so growth accelerates the longer you stay invested.
What formula does this calculator use?
The standard periodic compounding formula A = P(1 + r/n)ⁿᵗ, with monthly contributions added each period before interest is applied.
What is the Rule of 72?
Divide 72 by your annual return to estimate doubling time. At 8%, money doubles roughly every 9 years.
Does compounding frequency matter?
Slightly — daily beats monthly beats annual, but the gap is small at typical rates. Time invested and contribution amount matter far more.