Compound Interest Calculator

Compound interest is interest earned on both your principal (initial investment) and previously earned interest. Here is an example: you invest $1,000 at 5% annual interest. After year 1, you have $1,050 (principal $1,000 + interest $50). In year 2, you earn 5% on the full $1,050, not just the original $1,000, giving you $1,102.50. The difference comes from compounding frequency. If that same $1,000 compounds monthly instead of annually at 5% APR, you earn smaller amounts each month but accumulate faster—growing to $1,051.14 after year 1. Over 30 years, monthly compounding yields significantly more wealth than annual compounding due to the power of earning interest on interest.

Simple interest calculates earnings only on your principal: $1,000 at 5% simple interest earns $50 per year forever, growing to $1,500 after 10 years. Compound interest earns interest on interest, growing exponentially. That same $1,000 at 5% compounded annually reaches $1,629 after 10 years—$129 more. The difference compounds dramatically over decades. Most US savings accounts, CDs, money market funds, and stock market investments use compound interest, which is why starting early is so powerful. A 25-year-old investing $500/month at 7% annual returns will accumulate roughly $1.2 million by age 65 due to compounding, while a 35-year-old investing the same amount accumulates only $550,000.

First, start as early as possible—time is your most powerful variable. A dollar invested at 25 grows for 40 years; invested at 45 grows for only 20 years. Second, use tax-advantaged accounts like Roth IRAs and 401(k)s where gains compound tax-free and you owe no taxes on withdrawals in retirement. Third, reinvest all dividends and interest instead of spending them—this accelerates compounding. Fourth, seek higher yields: high-yield savings accounts currently offer 4.5–5% APY in 2025, significantly more than traditional banks at 0.01%. Finally, avoid withdrawing early. Penalties, taxes, and lost compounding can devastate your wealth. If you invest $100,000 today at 7% for 30 years, you get $761,000; withdraw 10% at year 10 and you end up with only $685,000 total at year 30.