What Is Compound Interest?
Compound interest is the interest on both the original principal and the interest that has already been added to that principal. The standard formula for compound interest is:
A = P × (1 + r/n)^(n × t)
Where A is the future value, P is the principal (initial investment), r is the annual interest rate (decimal), n is the number of compounding periods per year, and t is the number of years.
Why Recurring Contributions Accelerate Growth
Regular deposits add principal over time, which then earns interest itself. This “interest on interest” effect compounds faster when you contribute frequently and start early.
Daily vs Monthly vs Annual Compounding
More frequent compounding (e.g., monthly or daily) yields a slightly higher effective annual rate than less frequent compounding at the same nominal APR. For typical consumer rates, the difference is modest, but for high rates or long horizons it becomes more meaningful.
Common Use Cases
- Retirement savings (IRAs, brokerage accounts)
- Education funds
- Emergency funds with long-term goals
- Business savings and capital accumulation
Practical Tips
- Start early, time is the strongest lever for compounding.
- Increase contribution amounts over time (raises acceleration).
- Prefer more frequent contributions (monthly > yearly) to capture compounding sooner.
- Watch fees, net returns matter far more over long horizons.
Frequently Asked Questions
What is the difference between compounding frequency and contribution frequency?
Compounding frequency determines how often interest is calculated and added to the balance. Contribution frequency is how often you deposit money. Both affect growth.
Can I use this calculator for irregular contributions?
This version assumes regular contributions (monthly or yearly). For irregular contributions, a schedule-based simulator is more accurate.
Does it account for inflation or taxes?
No, this calculator shows nominal growth. Consider adjusting inputs or using an inflation toggle (future enhancement) to see real returns.
Disclaimer: This tool produces illustrative estimates only. Actual investment returns vary with market performance, fees, taxes, and account type. Consult a financial professional for personalized advice.