Our compound interest calculator allows you to determine the interest you may earn on your savings, investments, or 401k over a specified period. The tone is formal and objective, and the text is grammatically correct and follows a logical structure.
To use the calculator, enter your initial investment (principal amount), interest rate, compound frequency, and the duration of your investment. You can also include regular deposits or withdrawals to see how they affect the future value. No changes in content were made to ensure the text remains faithful to the original source.
Table of Contents
Compound interest: what is it?
Compound interest is the concept of ‘interest on interest'. It means that the accumulated interest is added back onto the principal sum, and future interest calculations are made on both the original principal and the already-accrued interest.
Combining the power of interest compounding with regular, consistent investing over a sustained period of time is an effective growth strategy for accelerating the long-term value of your savings or investments.
Compound interest is incredibly important. Warren Buffett, one of the world's most successful investors, can attest to its power.
“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Warren Buffett, 2010
How do you calculate compound interest?
Compound interest is calculated using the formula A = P(1+r/n)^nt. For annual compounding, multiply the initial balance by one plus the annual interest rate raised to the power of the number of time periods (years). This gives a combined figure for principal and compound interest.
The compound interest formula will be broken down into its individual parts.
A = P(1+r/n)^nt
Where:
A = the future value of the investment
P = the capital balance
r = the annual interest rate (decimal)
n = the number of times the interest is compounded per year
t = the time in years
^ = … to the power of
How to Calculate Monthly Compound Interest?
This guide will show you how to calculate monthly compound interest using our formula. Monthly compound interest means that interest is compounded 12 times per year.
- Divide your annual interest rate (in decimal form) by 12 and add 1 to calculate your monthly interest rate.
- Raise the resulting figure to the power of the number of years multiplied by 12.
- Multiply your result from step 2 by the principal balance (P).
- To calculate only the interest, subtract the principal balance from the result obtained in step 3.
The formula can be represented as follows:
A = P(1 + r/12)^12
The Advantages of Compound Interest
Pictures can be helpful in understanding complex concepts, and the benefits of compound interest are no exception. The power of compound interest is evident when examining a graph of long-term growth.
The following graph illustrates the growth of an initial $1,000 investment over a 20-year period with a 10% annual compounding rate.
Comparing the compound interest line in our graph to those for standard interest and no interest, it is evident how compound interest increases the investment value over time.
What will $10,000 be worth in 20 years?
To calculate this, let's use a more realistic example scenario. Imagine you have $10,000 in a savings account earning 5% interest per year, with annual compounding. If you intend to leave the investment untouched for 20 years, your investment projection would look like this…
Year | Interest Calculation | Interest Earned | End Balance |
---|---|---|---|
Year 1 | $10,000 x 5% | $500 | $10,500 |
Year 2 | $10,500 x 5% | $525 | $11,025 |
Year 3 | $11,025 x 5% | $551.25 | $11,576.25 |
Year 4 | $11,576.25 x 5% | $578.81 | $12,155.06 |
Year 5 | $12,155.06 x 5% | $607.75 | $12,762.82 |
Year 6 | $12,762.82 x 5% | $638.14 | $13,400.96 |
Year 7 | $13,400.96 x 5% | $670.05 | $14,071 |
Year 8 | $14,071 x 5% | $703.55 | $14,774.55 |
Year 9 | $14,774.55 x 5% | $738.73 | $15,513.28 |
Year 10 | $15,513.28 x 5% | $775.66 | $16,288.95 |
Year 11 | $16,288.95 x 5% | $814.45 | $17,103.39 |
Year 12 | $17,103.39 x 5% | $855.17 | $17,958.56 |
Year 13 | $17,958.56 x 5% | $897.93 | $18,856.49 |
Year 14 | $18,856.49 x 5% | $942.82 | $19,799.32 |
Year 15 | $19,799.32 x 5% | $989.97 | $20,789.28 |
Year 16 | $20,789.28 x 5% | $1,039.46 | $21,828.75 |
Year 17 | $21,828.75 x 5% | $1,091.44 | $22,920.18 |
Year 18 | $22,920.18 x 5% | $1,146.01 | $22,920.18 |
Year 19 | $24,066.19 x 5% | $1,203.31 | $25,269.50 |
Year 20 | $25,269.50 x 5% | $1,263.48 | $26,532.98 |
$10,000 invested at a fixed 5% annual interest rate, compounded annually, will grow to $26,532.98 after 20 years. This represents a total interest of $16,532.98 and a return on investment of 165%.
These calculations assume a fixed yearly interest rate percentage. If you invest your money instead of saving it in fixed rate accounts, returns on investments will vary annually due to economic fluctuations.
Compounding with additional deposits.
Combining interest compounding with regular deposits into your savings account, SIP, Roth IRA or 401(k) is an efficient saving strategy that can boost the growth of your money in the long term.
For example, if we were to contribute an additional $100 per month into our investment, our balance after 20 years would reach $67,121, with $33,121 in interest on total deposits of $34,000.
Financial institutions suggest that starting to make regular investment contributions early in life can lead to significant growth in savings over time due to the compounding effect of interest and the benefits of Dollar-cost or Pound-cost averaging.
Investment Options for Compound Interest
The question of where to invest to earn the most compound interest is a common inquiry in our email inbox. People often consider mutual funds, ETFs, MMRs, and high-yield savings accounts and want to know which option is best.
At The Calculator Site, we strive to develop high-quality tools to assist you with your financial calculations. However, we cannot provide advice on where to invest your money to achieve the best returns for you. We recommend consulting a qualified financial advisor for advice based on your individual circumstances.
FAQs about our Compound Interest Calculator
When is my interest compounded?
Interest can be compounded at either the start or end of the compounding period for savings and investments. Our calculator allows you to include additional deposits or withdrawals at either the start or end of each period.
May I include regular withdrawals?
Regular withdrawals can be included in your compound interest calculation as either a monetary withdrawal or as a percentage of interest/earnings. This can be used in combination with regular deposits.
For example, you may want to include regular deposits while also withdrawing a percentage for taxation reporting purposes. Alternatively, you may be considering retirement and wondering how long your money might last with regular withdrawals.
What is the effective annual interest rate?
The effective annual rate, also known as the annual percentage yield, is the interest rate that you actually receive on your savings or investment after factoring in compounding.
The more frequently interest is compounded within the year, the higher the effective annual interest rate will be.
What is RoR/TWR?
In the results section of our compound interest calculator, you will see either a RoR or TWR figure for your calculation. TWR stands for Time-Weighted Return, which is a measure of the compound rate of growth in a portfolio.
The Rate of Return (RoR) is the percentage return on your investment over the entire investment term. It is calculated by subtracting the initial investment figure from the final value, dividing the resulting figure by the initial investment, and then multiplying it by 100.
It is calculated by taking the product of the growth rates of each sub-period, subtracting 1, and multiplying by 100. We use TWR to account for the effects of cash flows on investment returns.
RoR = (Final value – Initial investment) / Initial investment × 100
If regular deposits or withdrawals are included, a Time-Weighted Return (TWR) figure will be provided instead.
To calculate RoR, use the formula: The TWR figure represents the cumulative growth rate of the investment, calculated by breaking out each period's growth individually to remove the effects of any additional deposits and withdrawals.
The TWR figure represents the cumulative growth rate of the investment, calculated by breaking out each period's growth individually to remove the effects of any additional deposits and withdrawals.
The Time-Weighted Return (TWR) provides a clear picture of your investment's performance without the impact of additional deposits or withdrawals. This allows for a more accurate assessment of overall performance. To learn more about TWR, refer to The Balance article.
Before you leave,
Here's a final tip: to estimate how long it will take to double your savings using compound interest, use the rule of 72. Simply divide 72 by your annual interest rate.
For instance, if you earn 3% per year, divide 72 by 3 to get 24. This means your initial investment will double in approximately 24 years. If you earn 6%, your money will double in about 12 years, thanks to the power of compound interest.