About Compound Interest
Compound interest is a powerful financial concept where you earn interest not only on your initial investment but also on the accumulated interest over time. It's often described as "interest on interest" and is a key factor in long-term investment growth.
How It Works
With compound interest, your investment grows at an accelerating rate. The more frequently interest is compounded (daily, monthly, quarterly, etc.), the faster your money grows. This calculator allows you to see the difference various compounding frequencies make.
The Impact of Additional Contributions
Regular additional contributions can dramatically increase your investment's growth. This calculator shows how consistent deposits, combined with compound interest, can help you reach your financial goals faster.
Frequently Asked Questions
How does compound interest work?
Compound interest is the interest you earn on both your original investment and the interest that accumulates over time. It's often called "interest on interest" and can significantly boost your investment growth compared to simple interest.
What's the difference between daily, monthly, and annual compounding?
The more frequently interest is compounded, the faster your money grows. Daily compounding earns slightly more than monthly, which earns more than annual compounding. For example, $10,000 at 5% interest compounded daily would grow to $16,532.98 in 10 years, while annual compounding would result in $16,288.95.
How much should I invest monthly to reach my financial goals?
This depends on your goals, timeline, and expected returns. Use our calculator to experiment with different monthly contributions. For example, investing $500 monthly at 7% annual return would grow to about $86,000 in 10 years, $240,000 in 20 years, and $520,000 in 30 years.
What's the Rule of 72?
The Rule of 72 is a quick way to estimate how long it will take for your investment to double. Divide 72 by your annual interest rate to get the approximate number of years. For example, at 6% interest, your money would double in about 12 years (72 ÷ 6 = 12).
How does inflation affect compound interest?
Inflation reduces the real value of your returns. For example, if your investment earns 5% annually and inflation is 2%, your real return is only 3%. This is why it's important to consider inflation when planning long-term investments.
What's the best way to maximize compound interest?
To maximize compound interest: 1) Start investing early, 2) Make regular contributions, 3) Choose investments with higher returns, 4) Reinvest your earnings, and 5) Stay invested for the long term. Even small differences in these factors can lead to significant differences in your final balance.