What is compound interest?
Compound interest is interest earned on interest. In the first year you earn a return on the money you put in. In the second year you earn a return on that money plus the first year's gains. Over long periods this snowball effect is what turns modest, steady saving into a large balance.
Simple interest, by contrast, only ever pays on the original amount. $10,000 at 7% simple interest earns $700 every year, forever. With compounding, the yearly gain grows each year, and after 30 years it is several times larger.
The compound interest formula
For a single deposit, the future value is:
A = P × (1 + r/n)n·t
P is the starting amount, r the annual rate as a decimal, n the number of compounding periods per year, and t the number of years. When you also add money every month, each contribution compounds from the month it goes in. This calculator steps through every month to account for that, adding your contribution and applying the matching share of interest.
Why starting early matters so much
Time is the strongest input in the formula. Compare two savers who each earn 7% a year:
- Saver A invests $300 a month from age 25 to 35, then stops. They contribute $36,000 in total.
- Saver B invests $300 a month from age 35 to 65. They contribute $108,000 in total.
At 65, Saver A ends up with roughly $420,000 and Saver B with roughly $365,000, even though B put in three times as much money. Saver A's early dollars simply had 30 extra years to compound.
The Rule of 72
For a quick mental estimate of how long it takes money to double, divide 72 by the yearly return. At 4% that's about 18 years; at 8%, about 9 years. The calculator shows this figure for the rate you enter so you can see the effect at a glance.
Making the most of compounding
- Automate contributions so saving happens before you can spend the money.
- Keep fees low. A 1% yearly fee comes straight out of your return and compounds against you.
- Reinvest dividends and interest instead of withdrawing them.
- Use tax-advantaged accounts where available, so taxes don't slow growth every year.
- Pay off high-interest debt first. A credit card at 23% compounds against you faster than most investments grow. See our credit card payoff calculator.
Frequently asked questions
What is the Rule of 72?
The Rule of 72 is a quick way to estimate how long money takes to double: divide 72 by the annual return. At 6%, money doubles in about 12 years; at 9%, in about 8 years.
Does compounding frequency matter much?
It matters a little. More frequent compounding (daily versus yearly) gives a slightly higher result at the same stated rate, but the rate itself, the time invested and how much you contribute matter far more.
What return should I assume?
Savings accounts pay a known rate. For stock investments, many people use a conservative long-run assumption of 5% to 7% after inflation. Real returns vary year to year and are never guaranteed.
Projections are hypothetical and do not account for taxes, fees or inflation unless you adjust the rate yourself. Past returns don't guarantee future results.