What is Compound Interest?
Compound interest is the concept of earning "interest on your interest." Unlike simple interest, where you only earn money on your initial deposit, compound interest allows your wealth to grow exponentially over time. Albert Einstein famously reportedly called it the "eighth wonder of the world."
The Math Behind the Magic
A = P(1 + r/n)nt
- A = The future value of the investment
- P = The principal investment amount
- r = The annual interest rate (decimal)
- n = The number of times interest is compounded per year
- t = The number of years the money is invested
The Rule of 72: A Mental Shortcut
Want to know how long it takes to double your money? Divide 72 by your interest rate.
4%
Doubles in 18 Years
8%
Doubles in 9 Years
12%
Doubles in 6 Years
Frequently Asked Questions
Does frequency matter?
Yes! Compounding Monthly earns more than Annually because your interest gets added to the pile sooner.
How do I factor in Inflation?
This calculator shows the "Nominal" value (the number on the check). To see the "Real" purchasing power, subtract the inflation rate (avg 3%) from your return rate. For a detailed inflation analysis, use our Retirement Planner.