How compound interest works
Compound interest means you earn interest not just on your original principal, but on the interest that’s already accumulated. Adding regular contributions on top compounds their growth too — each deposit has more time to grow the earlier it’s made.
The formula
FV = P × (1 + r/n)^(n×t) + PMT × [((1 + r/n)^(n×t) − 1) / (r/n)] P = principal PMT = contribution per compounding period r = annual interest rate n = compounding periods per year t = years If r = 0: FV = P + PMT × n × t
Worked example
$10,000 principal, no additional contributions, 5% annual interest, compounded annually, over 10 years:
- FV = $10,000 × (1.05)^10 = $16,288.95
- Total contributed: $10,000 (just the principal)
- Interest earned: $16,288.95 − $10,000 = $6,288.95
Frequently asked questions (FAQ)
How does compounding frequency affect my return?
More frequent compounding (monthly vs. annually, for example) earns slightly more, because interest starts earning its own interest sooner. The difference is usually small at typical rates, but it grows with higher rates and longer time horizons.
What is the Rule of 72?
A quick mental-math shortcut: divide 72 by your annual interest rate (as a whole number) to estimate how many years it takes your money to double. At 6% interest, that's 72 ÷ 6 = 12 years — a rough approximation, not a substitute for this calculator's exact math.
Is this growth guaranteed?
No. This calculator assumes a constant, guaranteed rate of return for illustration — real investments (stocks, mutual funds) fluctuate year to year and are not guaranteed. It's most accurate for products with a fixed, stated rate, like a CD or a savings account.
Does this account for inflation or taxes?
No — this shows nominal (before-inflation, before-tax) growth. Inflation erodes purchasing power over time, and investment gains may be taxable depending on the account type, so your real, after-tax return will typically be lower than the figure shown here.
What's the difference between principal and contributions in the results?
Principal is the lump sum you start with; contributions are the amounts you add on top over time (like a monthly deposit). The results break out how much of your final balance came from money you put in versus interest the money earned on its own.