💰 Ever heard the phrase “let your money work for you”? That’s what compound interest does—it helps your savings grow faster over time by earning interest on your interest.
Let’s break down what it is, how it works, and how to calculate it—even if you’re not a math whiz!
Table of Contents
⚙️ Compound Interest Calculator
Use the tool below to calculate the final $ value of an initial investment. Enter the interest rate, compounding interval and total time period.
🙋 What Is Compound Interest?
Compound interest means you earn interest not just on the money you put in (called the principal), but also on the interest that’s already been added.
In simple terms:
💸 Your money earns money, and then that money earns more money!
🧮 The Compound Interest Formula
Here’s the formula used to calculate compound interest:
A = P(1 + r/n)^(nt)Let’s break it down:
| Symbol | What it means |
|---|---|
| A | Final amount (what you’ll have in the end) |
| P | Principal (the amount you start with) |
| r | Annual interest rate (in decimal) |
| n | Number of times interest is compounded per year |
| t | Number of years |
✏️ Example: Let’s Do the Math
You invest $1,000 at an interest rate of 5% per year, compounded annually, for 3 years.
P = 1000
r = 0.05
n = 1 (compounded once per year)
t = 3Plug it into the formula:
A = 1000(1 + 0.05/1)^(1×3)
A = 1000(1.05)^3
A ≈ 1000 × 1.1576 = $1,157.63🎉 You’ll have $1,157.63 after 3 years.
That’s $157.63 in interest—and it grows faster each year!
🔁 What If It’s Compounded Monthly?
Let’s use the same example, but with monthly compounding:
- n = 12 (months per year)
A = 1000(1 + 0.05/12)^(12×3)
A = 1000(1.004167)^36 ≈ $1,161.62✅ You earn even more because the interest is added more often!
📈 The Power of Time
The longer you let your money grow, the more powerful compound interest becomes.
Even a small investment can grow into a large amount if you:
- Start early
- Stay consistent
- Leave it alone to grow
💡 Quick Tips
- The more often it’s compounded, the more you earn
- The higher the interest rate, the faster it grows
- Always use the decimal version of your interest rate (e.g., 5% = 0.05)
- Use online calculators to save time!
📘 Real-Life Examples
- 💳 Credit cards (they use compound interest against you!)
- 🏦 Savings accounts
- 📈 Investment accounts
- 🏠 Mortgages and loans