How compound interest works
Compound interest is the reason a modest amount of money left alone for long enough can turn into a large one. You earn interest on your deposit, then next period you earn interest on the deposit plus the interest already added, and so on. Each round builds on the last, which is why the growth curve starts almost flat and then bends sharply upward the longer you leave it.
The maths behind it is A = P (1 + r/n) raised to n times t, where P is your starting amount, r is the annual rate as a decimal, n is how many times a year interest is added, and t is the number of years. You do not need to touch the formula yourself. Set the amount, rate, frequency and time, and the future value updates as you type.
Two examples
Put 1,000 in at 5% compounded monthly and leave it for 10 years. It grows to about 1,647, so you earn roughly 647 without adding a single extra cent. The money did the work.
Now leave that same 1,000 at 5% for 30 years instead of 10. It grows to about 4,468. Tripling the time did not triple the result, it more than quadrupled the interest, because the later years compound on a much larger balance. Time is the ingredient that matters most.
How do you get the most from compound interest?
- Start as early as you can. The first years look boring, but they are what the later explosive growth is built on.
- Leave it untouched. Every withdrawal removes money that would have compounded for years.
- Compound more often when you can. Daily beats monthly beats yearly at the same rate, though the gap is small at modest rates.
What is the mistake to avoid?
Underestimating long time frames. People often assume growth is steady, so they judge a 30-year result by scaling up a 5-year one. Compounding does not work like that. The back half of a long run does far more than the front half, which is exactly why waiting to start is so expensive.
Frequently asked questions
Is compound better than simple interest for savings?
Almost always. It earns interest on your interest, so over long periods it grows much faster than simple interest at the same rate.
Does adding money regularly change this?
This version grows a single starting amount. To include regular monthly deposits, use the investment or savings goal calculator.
What is the difference from simple interest?
Simple interest is calculated only on the original amount. Compound interest is calculated on the amount plus all interest already earned.
Does this include monthly deposits?
No. It compounds a single starting amount. A regular-savings calculator is on our roadmap.
Can I use it for loans?
It models growth of savings. For a loan repayment, use the loan calculator instead.