Compound interest is interest that earns interest. Money left alone grows on the whole balance each period, not just on what you originally put in, and over long stretches that difference stops being small.
Enter a starting amount, a rate and a number of years above. The table and chart show the balance year by year, which is where the effect becomes visible — the line bends upward rather than running straight.
Key terms
- Principal — the amount you start with.
- Compounding frequency — how often interest is added to the balance. More often means slightly faster growth, because each addition starts earning immediately.
- Contribution — money you add each period. Optional, and for most people it matters more than the rate.
- Simple interest — the opposite arrangement, where interest is calculated only on the original principal and never compounds.
How it works
Each period the balance is multiplied by one plus the periodic rate, and any contribution is added. The periodic rate is the annual rate divided by the number of periods in a year — 6% compounded monthly is 0.5% a month.
Compound interest
A = P (1 + r ÷ n)n t
P is the principal, r the annual rate, n the number of compounding periods per year and t the number of years. With contributions the calculator steps through period by period instead, which handles both at once.
The SEC’s own illustration is the clearest one: $100 earning 5% a year becomes $105 after one year. After two years it is $110.25 — not $110, because the $5 of interest earned $0.25 of its own. That extra quarter is the whole idea, and over decades it becomes most of the balance.
Why frequency matters less than people expect
Compounding monthly rather than annually helps, but modestly. $1,000 at 12% for a year comes to $1,120 compounded annually and $1,126.83 compounded monthly — under $7 apart. Daily compounding adds a few cents more. Rate and time do the heavy lifting; frequency is a rounding detail by comparison.
Time is the input with by far the largest effect, because it sits in the exponent. Doubling the rate roughly doubles the growth; doubling the time squares it.
How to use this calculator
- Enter what you are starting with. Zero is fine if you are starting from nothing and contributing.
- Enter the annual rate as a percentage — 6, not 0.06.
- Set the number of years and how often interest is added.
- Add a per-period contribution if you plan to pay in regularly.
- Read the table for the year you care about, and compare “paid in” with “interest” — the year those two cross is worth noticing.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is calculated on the original principal only, so it produces the same amount every period. Compound interest is calculated on the current balance, which includes interest already earned, so each period produces slightly more than the last.
Does compounding more often make a big difference?
Less than most people assume. Moving from annual to monthly compounding on 12% for one year adds under 0.7% of the balance. The rate and the number of years matter far more.
Does this account for inflation or tax?
No. The result is a nominal figure. Real spending power will be lower after inflation, and interest is often taxable depending on the account and the country. Treat it as a growth calculation, not a forecast of what you can spend.
What rate should I use for investments?
There is no correct answer, because investment returns vary year to year and can be negative. This calculator applies one fixed rate every period, which is a reasonable way to explore scenarios but not a prediction. Regulators generally advise against assuming any particular return.
When are contributions added?
At the end of each compounding period, so the final contribution earns no interest. Adding at the start of the period would produce a slightly higher figure.
