Compound Interest Calculator

What is Compound Interest?

Compound interest is often described as "interest on interest." It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

Unlike simple interest, which is calculated only on the principal amount, compound interest grows at an accelerating rate. Albert Einstein is often credited with calling compound interest "the eighth wonder of the world," saying, "He who understands it, earns it; he who doesn't, pays it."

How Does This Calculator Work?

This calculator helps you project the future value of an investment by considering three main factors:

1. Initial Principal: The starting amount of your investment.
2. Regular Contributions: The amount you plan to add to the account on a monthly or annual basis.
3. Compounding Frequency: Although the tool defaults to monthly compounding for visual smoothness, it demonstrates how frequency impacts the final result.

The Compound Interest Formula

The formula used for calculating compound interest with periodic contributions is:

► A = P(1 + r/n)^nt + PMT × [((1 + r/n)^nt - 1) / (r/n)]

Variables Explained:

• A: The future value of the investment, including interest.
• P: The initial principal investment amount.
• r: The annual interest rate (e.g., 0.07 for 7%).
• n: The number of times interest is compounded per year.
• t: The number of years the money is invested.
• PMT: The additional amount contributed each period.

Benefits of Compounding

• Exponential Growth: Over long periods, compounding allows your wealth to grow exponentially.
• Early Start: The earlier you start investing, the more time your interest has to "compound," leading to significantly larger totals even with smaller contributions.
• Wealth Accumulation: It is the primary tool used for retirement planning and long-term goal setting.

Tips for Maximizing Growth

• Minimize Fees: High management fees can eat into your compounding returns over time.
• Stay Consistent: Regular contributions, even if small, can make a massive difference in the long run.
• Reinvest Dividends: If you are investing in stocks or funds, reinvesting dividends is a form of compounding that boosts your total return.

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