How compound interest works
With compound interest you earn interest on your interest. Each period your balance grows, and the next period's interest is calculated on that larger balance. The longer your money compounds and the more often it compounds, the bigger the effect. Adding a regular monthly contribution accelerates it even further.
The compound interest formula
For a lump sum with no contributions, the classic formula is:
A = P × (1 + r/n)n·t
P is the starting amount, r is the annual rate, n is how many times a year it compounds, and t is the number of years. This calculator extends that by adding your monthly contributions as it goes, then splits the result into what you put in versus interest earned.
Worked example
Start with $1,000, add $200/month at 6% compounded monthly for 20 years:
- Total you put in: $49,000
- Total interest earned: ≈ $46,718
- Final balance: ≈ $95,718
Almost half the final balance is interest you never deposited.
Simple vs compound, and the Rule of 72
Simple interest pays only on your original principal; compound interest pays on principal plus past interest, so it pulls ahead more every year. A quick mental shortcut is the Rule of 72: divide 72 by your rate to estimate the years to double. At 6%, that's 72 ÷ 6 = 12 years — so $10,000 at 6% becomes about $20,500 in 12 years.
Key terms
Principal — your starting amount. Compounding frequency — how often interest is added (daily, monthly, yearly). APY — the effective yearly rate after compounding. Contribution — money you add regularly. Time horizon — how long you let it grow, the most powerful factor of all.
Common mistakes to avoid
Overestimating the rate and assuming guaranteed growth — markets vary. Obsessing over daily vs monthly compounding, which barely moves the result. Underrating time: a late start is the hardest gap to close. Confusing nominal rate with APY when comparing savings accounts.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is paid only on the original principal. Compound interest is paid on principal plus all previously earned interest, so it grows faster.
Does compounding frequency matter?
Yes, but less than people expect. Daily vs monthly makes only a small difference; the rate, amount, and time matter far more.
What is the Rule of 72?
Divide 72 by your annual return to estimate the years it takes your money to double. At 6%, that's about 12 years.
What is a realistic interest rate to use?
It depends where your money is. High-yield savings pay a few percent; long-term stock averages have been higher but come with risk.
Does it include my contributions?
Yes. "Total you put in" is your starting amount plus all monthly contributions; "Total interest earned" is everything above that.
What's the difference between interest rate and APY?
APY is the effective annual rate after compounding is applied, so it's slightly higher than a nominal rate that compounds during the year.
Can I model a one-time deposit only?
Yes. Set the monthly contribution to 0 and the calculator uses the lump-sum compound interest formula above.
Is my data saved?
No. The calculation runs entirely in your browser; nothing is uploaded.