Understanding Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It’s often called “interest on interest” and can make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

How Compound Interest Works

The formula for compound interest is:

A = P(1 + r/n)^(nt)

• A = the future value of the investment/loan, including interest
• P = the principal investment amount (the initial deposit or loan amount)
• r = the annual interest rate (decimal)
• n = the number of times that interest is compounded per year
• t = the number of years the money is invested or borrowed for

Why Compound Interest Matters

Compound interest can significantly boost investment returns over the long term. The more frequently interest is compounded, the greater the return. This calculator helps you visualize how small, regular investments can grow over time through the power of compounding.

Tips for Maximizing Compound Interest

• Start early: The earlier you start investing, the more time your money has to grow.
• Invest regularly: Consistent contributions can dramatically increase your final amount.
• Choose higher compounding frequencies: More frequent compounding leads to higher returns.
• Reinvest dividends and interest: Allow your earnings to compound rather than withdrawing them.
• Be patient: Compound interest works best over long periods.