What is compound interest?
Compound interest is interest calculated on the original balance and on the interest that has been added over time. In simple interest, interest is calculated only on the original amount. With compounding, each new period can begin with a larger balance.
That is why time is such an important part of saving and investing. The effect is usually modest at first, then becomes more visible as the balance and time horizon grow.
Compound interest formula
- A is the ending balance.
- P is the starting principal.
- r is the annual interest rate as a decimal.
- n is the number of times interest compounds each year.
- t is the number of years.
The formula assumes no additional deposits. A calculator can include recurring monthly contributions, which is often more realistic for a savings plan.
Compound interest example
Suppose you deposit $10,000 in an account that earns 5% per year and compounds annually. With no extra contributions, the balance after 10 years is about $16,289. The $6,289 difference is compound interest.
| Starting balance | Annual rate | Time | Ending balance |
|---|---|---|---|
| $10,000 | 5% | 1 year | $10,500 |
| $10,000 | 5% | 5 years | About $12,763 |
| $10,000 | 5% | 10 years | About $16,289 |
Why regular contributions matter
Adding money consistently can have as much impact as the interest rate. For example, a $10,000 starting balance plus $200 each month creates a much larger final balance than leaving the original amount alone. Every contribution has time to earn future interest, although newer deposits have less time than earlier ones.
When using an expected return, remember that real investment returns can move up and down and are not guaranteed. A calculator is useful for exploring scenarios, not predicting a certain result.
Does compounding frequency matter?
At the same stated annual rate, more frequent compounding generally produces slightly more interest. Monthly compounding is usually higher than annual compounding because interest is credited earlier. Over a short period the difference can be small; over many years it can become more meaningful.
The Rule of 72
The Rule of 72 is a quick estimate for how long it may take an amount to double. Divide 72 by the annual rate. At 6%, the estimate is about 12 years; at 8%, it is about 9 years. It is only a shortcut, but it gives a useful sense of how rate and time work together.
Try a compound interest calculator
Use different starting amounts, contribution levels, rates and time periods to compare possible outcomes.
Open the compound interest calculatorFrequently asked questions
What is compound interest?
It is interest earned on both the original balance and prior interest. This can accelerate growth as more time passes.
What is the compound interest formula?
The standard formula is A = P(1 + r/n)ⁿᵗ. It calculates the ending balance from principal, rate, compounding frequency and time.
Does monthly compounding make a difference?
Yes, but usually less than the effect of time, rate and regular contributions. Monthly compounding credits interest earlier than annual compounding.
Is compound interest guaranteed?
No. Guaranteed account rates and investment returns are different. Check the specific terms of an account or investment before making decisions.