Compound Interest Calculator
A compound interest calculator is a financial tool that helps you determine how your investments or savings will grow over time when the interest earned is added back to the principal amount, generating interest on previously earned interest.
When to Use a Compound Interest Calculator
You can use a compound interest calculator in the following scenarios:
- Planning for long-term investments such as retirement funds or education savings
- Comparing different investment options with varying interest rates and compounding frequencies
- Understanding how your debt (like credit cards or loans) grows if not paid off promptly
How to Calculate Compound Interest
The formula for calculating compound interest is:
A = P(1 + r/n)nt
Where:
- A = Final amount (principal + interest)
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- n = Compounding frequency per year
- t = Time in years
Interest earned = A - P
Compounding Frequency Options
The compound frequency determines how often the interest is calculated and added to your principal amount:
- Annually (1 time per year)
- Semi-annually (2 times per year)
- Quarterly (4 times per year)
- Monthly (12 times per year)
- Daily (365 times per year)
Examples
Example 1: Basic Compound Interest
Suppose you invest $5,000 at an interest rate of 5% compounded annually for 10 years. What will be the final amount and interest earned?
| Parameter | Value |
|---|---|
| Initial Principal (P) | $5,000 |
| Annual Interest Rate (r) | 5% |
| Time Period (t) | 10 years |
| Compounding Frequency (n) | 1 (Annually) |
| Final Amount (A) | $8,144.47 |
| Interest Earned | $3,144.47 |
Example 2: Different Compounding Frequencies
If you invest $10,000 at an interest rate of 6% for 5 years, how does the compounding frequency affect your returns?
| Compounding Frequency | Final Amount | Interest Earned |
|---|---|---|
| Annually (1) | $13,382.26 | $3,382.26 |
| Semi-annually (2) | $13,468.55 | $3,468.55 |
| Quarterly (4) | $13,513.59 | $3,513.59 |
| Monthly (12) | $13,548.13 | $3,548.13 |
Example 3: Long-Term Investment Growth
How much would $1,000 grow over 30 years at 7% interest compounded monthly?
| Parameter | Value |
|---|---|
| Initial Principal (P) | $1,000 |
| Annual Interest Rate (r) | 7% |
| Time Period (t) | 30 years |
| Compounding Frequency (n) | 12 (Monthly) |
| Final Amount (A) | $8,115.31 |
| Interest Earned | $7,115.31 |
The Power of Compound Interest
Compound interest demonstrates how small initial investments can grow significantly over time. The three key factors affecting compound interest growth are:
- Time: Longer investment periods lead to exponentially greater returns
- Interest rate: Higher rates produce larger growth
- Compounding frequency: More frequent compounding leads to greater returns