What is compound interest?

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only applies to the original deposit, compound interest causes your balance to grow exponentially over time. The more frequently interest compounds — daily, monthly, quarterly, or annually — the faster your money grows.

How does compounding frequency affect my returns?

More frequent compounding generates slightly higher returns with the same stated interest rate. For example, $10,000 at 6% compounded annually for 20 years grows to $32,071. With monthly compounding at the same 6%, it grows to $33,102 — an extra $1,031. Daily compounding yields even a bit more. The difference becomes more significant over longer time periods and larger balances.

What is the Rule of 72?

The Rule of 72 is a quick mental math shortcut to estimate how long it takes to double your money. Divide 72 by your annual interest rate. For example, at 6% annual return, your money doubles in roughly 72 ÷ 6 = 12 years. At 4%, it takes about 18 years. At 9%, about 8 years. This rule works reasonably well for rates between 2% and 15%.

How much should I save each month?

A common guideline is to save 20% of your take-home pay (the 50/30/20 rule). For retirement, aim to save 15% of gross income including employer matches. However, the right amount depends on your goals, timeline, and current expenses. Use this calculator to experiment with different monthly contribution amounts to see what it takes to reach your target balance.

What's the difference between APR and APY?

APR (Annual Percentage Rate) is the stated interest rate before accounting for compounding. APY (Annual Percentage Yield) reflects the actual return including compounding effects. For savings accounts and CDs, APY is the more useful figure because it tells you what you actually earn over a year. A 6% APR compounded monthly yields an APY of approximately 6.17%. Banks are required to disclose APY on savings products.

Compound Interest Calculator

Initial Principal

$100$500,000

Annual Interest Rate

0.5%15%

Compounding Frequency

Daily

Monthly

Quarterly

Annually

Investment Period

yrs

1 yr40 yrs

Monthly Contribution

$0$5,000

Final Balance

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Total Interest Earned

—

Total Contributions

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Return on Investment

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Growth Breakdown

Initial Deposit Monthly Contributions Interest Earned

Compound Interest Formula

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

P = Principal | r = Annual rate | n = Compounding periods/year | t = Years | PMT = Monthly contribution

Year-by-Year Growth

Year	Starting Balance	Contributions	Interest	Ending Balance

Frequently Asked Questions

Compound interest is interest calculated on both your initial principal and the accumulated interest from previous periods. This creates exponential growth over time — your interest earns interest. Albert Einstein allegedly called it the "eighth wonder of the world." A $10,000 deposit at 6% for 30 years grows to over $57,000 with compound interest vs. only $28,000 with simple interest.

More frequent compounding generates slightly higher returns at the same stated rate. Daily compounding earns a bit more than monthly, which earns more than quarterly or annually. The difference is subtle — on $10,000 at 6% over 20 years, daily vs annual compounding yields roughly $400 extra. The frequency matters more at higher rates and over longer time horizons.

The Rule of 72 estimates how many years it takes for an investment to double. Simply divide 72 by your annual interest rate. At 6%, money doubles in about 12 years. At 4%, about 18 years. At 9%, about 8 years. It's a handy mental shortcut that works well for rates between 2% and 15%. For more precise calculations, use the full compound interest formula above.

A popular guideline is the 50/30/20 rule: 50% on needs, 30% on wants, 20% on savings. For retirement specifically, many advisors suggest saving 15% of gross income (including employer contributions). The key is to start early — even $100/month invested at 7% for 40 years grows to over $262,000. Use our Savings Goal Calculator to find the exact monthly amount you need for your specific goal.

APR (Annual Percentage Rate) is the stated interest rate without compounding effects. APY (Annual Percentage Yield) reflects the actual return after compounding. Banks are required to advertise APY on savings products. A 6% APR compounded monthly yields an APY of ~6.17%. Always compare APY values when shopping for savings accounts or CDs — a lower APR with daily compounding can beat a higher APR with annual compounding.

For educational purposes only. Not financial advice. Consult a qualified financial advisor.

Rule of 72

Divide 72 by your interest rate to estimate years to double your money.

6% → 12 years

4% → 18 years

8% → 9 years

10% → 7.2 years