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| Year | Starting Balance | Contributions | Interest | Ending Balance |
|---|---|---|---|---|
Compound interest is often called "interest on interest" – it's the result of reinvesting interest, rather than paying it out, so that interest in the next period is earned on the principal sum plus previously accumulated interest.
For a principal amount with no additional contributions:
A = P(1 + r/n)^(nt)
Where:
For regular contributions, the formula becomes more complex:
A = P(1 + r/n)^(nt) + PMT × [(1 + r/n)^(nt) - 1] × (1 + r/n)^c / (r/n)
Where:
A quick way to estimate how long it will take for your investment to double: Divide 72 by your expected annual return (%). For example, at 7% interest, your money will double in approximately 72 ÷ 7 = 10.3 years.
This calculator provides estimates based on constant interest rates and contributions. Actual investment returns may vary year to year. Consult with a financial advisor for personalized investment advice.
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Compound interest represents one of the most powerful financial concepts available to investors. Unlike simple interest, which is calculated solely on the initial principal, compound interest is calculated on both the initial principal and the accumulated interest over time. This mechanism creates a snowball effect where your money grows at an increasingly faster rate the longer it's invested, often referred to as "interest on interest."
The Rule of 72 provides a quick mental calculation to estimate the time required to double your investment at a given interest rate. Simply divide 72 by the annual interest rate to approximate the years needed for your investment to double. For example, an investment with an 8% annual return would take approximately 9 years to double (72 ÷ 8 = 9). This demonstrates how higher rates and longer time horizons dramatically impact wealth accumulation.
The frequency of compounding also affects your returns. More frequent compounding periods—daily, monthly, or quarterly versus annually—result in higher returns over time, though the difference becomes less significant with longer investment periods. Regular contributions to your investment amplify the compound effect further, especially when started early. This illustrates the concept of "time in the market beats timing the market" and highlights why starting to invest early, even with smaller amounts, can be more beneficial than waiting to invest larger sums later.