What is compound interest?

Compound interest is interest earned on both your original principal and the interest already added to it. Unlike simple interest, where you only earn on the original principal, compound interest grows faster because each period's interest gets folded back into the balance.

In simple interest, a $10,000 balance at 5% would add $500 each year. With compounding, the $500 itself earns interest, so the balance grows more quickly over time.

The compound interest formula

A = P (1 + r/n)^n×t

• P: principal (starting amount)
• r: annual interest rate (decimal, so 5% = 0.05)
• n: compounding periods per year (12 for monthly, 365 for daily)
• t: time in years
• A: final amount after compounding

Worked example: P = $10,000, r = 0.05, n = 12, t = 10. First compute r/n = 0.05/12 ~ 0.004167. Then (1 + r/n) = 1.004167. Raise this to n x t = 12 x 10 = 120 periods: (1.004167)¹²⁰ ~ 1.647. Multiply by P: $10,000 x 1.647 ~ $16,470. The calculator does this automatically; try these formulas in the calculator to see the exact results.

Adding monthly contributions

Regular deposits act like a series of small investments. The calculator adds each contribution at the chosen frequency, then compounds the whole balance for the next period. This approximates the future value of a series of payments without you having to do the math.

Example: Start with $5,000, add $200 monthly, and assume 6% annual interest compounded monthly for 15 years. Each month, the calculator adds $200, compounds the new total, and repeats. You can adjust contributions in the calculator above to see how recurring deposits accelerate growth.

Daily vs monthly vs yearly compounding

More frequent compounding means interest is added more often, giving a slight boost over long periods. The calculator lets you switch frequency to see the difference.

• Yearly: Simpler to estimate but compounds only once per year.
• Monthly: Common for savings and many loans; a balanced default.
• Daily: Maximizes compounding within the year, producing a slightly higher final balance over time.

Over 10-20 years, the gap between yearly and daily compounding is noticeable but not dramatic; higher rates and longer timelines make the difference more visible.

Inflation and real returns

Inflation reduces what your future dollars can buy. A "real" return factors inflation out: real return ~ nominal return - inflation. The calculator's inflation setting estimates an inflation-adjusted final balance so you can see purchasing power in today's terms.

Example: If your nominal return is 7% and inflation is 3%, the real return is roughly 4%. Toggle the inflation input to view the inflation-adjusted balance alongside the nominal final balance.

Taxes and after-tax return (high-level)

Many investments are taxed on interest or gains. The calculator's tax setting applies a simplified average tax effect to the interest portion only. It is not country-specific and is for high-level estimation, not tax advice.

Set a tax rate to see an after-tax balance estimate, then compare it to the nominal and inflation-adjusted results. For deeper guides, visit the resources hub.