Compound Interest Calculator

Over the long run, the US stock market (S&P 500) has averaged about 10% annual return before inflation and 7% after inflation. Bonds average 4-5%. A diversified portfolio of 80% stocks and 20% bonds historically returns around 8-9% before inflation. Use 7% as a conservative long-term assumption for stock-heavy portfolios — anything higher and you're being optimistic.

Simple interest is calculated only on your original principal. Compound interest is calculated on your principal plus all accumulated interest, so your money grows on top of itself. Over short periods the difference is small. Over decades, compound interest produces dramatically larger results — this is the source of long-term wealth building.

The Rule of 72 is a mental math shortcut: divide 72 by your annual return rate to estimate how long it takes to double your money. At 7%, your money doubles every ~10.3 years. At 10%, every 7.2 years. It's not exact, but it's accurate enough to make quick comparisons without a calculator.

More frequent compounding produces slightly higher returns. The same 7% annual rate compounded monthly equals about 7.23% effective annual yield. Compounded daily, it's about 7.25%. The differences are small — what matters far more than frequency is the rate itself and how long you let it compound.

Three levers: start early, contribute consistently, and minimize fees and taxes. Starting at age 25 instead of 35 with the same monthly contribution typically doubles your final balance — time is the biggest lever. Index funds with expense ratios under 0.1% protect you from fee drag. Tax-advantaged accounts (401(k), Roth IRA, HSA) protect you from tax drag.

Inflation reduces the real purchasing power of your future money. If inflation averages 3% and your investments return 7%, your "real" return is closer to 4%. When projecting long-term goals, either use a lower assumed return (7% becomes 4% real) or inflate your target number. Don't ignore inflation — over 30 years it cuts the buying power of a dollar by more than half.

Yes — taxes can eat 15-37% of your gains depending on the account type and your income. Tax-advantaged accounts solve this: Roth IRAs and Roth 401(k)s grow tax-free, while traditional 401(k)s and IRAs defer taxes until withdrawal. Max out these accounts before investing in regular taxable accounts. The tax savings often exceed market gains over decades.

Compound interest grows exponentially with time. Someone who invests $500/month from age 25 to 65 ends up with roughly twice as much as someone who invests the same amount from age 35 to 65 — even though the early starter contributed only $60,000 more in total. The first decade of contributions does the heaviest lifting because that money compounds the longest.

Stocks (especially through index funds), bonds, REITs, and savings accounts all offer compounding when dividends and interest are reinvested. Real estate compounds through appreciation plus rental income reinvestment. Cryptocurrencies and individual stocks don't reliably compound — their returns are speculative, not driven by predictable compounding mechanics.

The formula is A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual rate as a decimal, n is the number of compounding periods per year, and t is the years. For regular contributions, add PMT × [((1 + r/n)^(nt) - 1) / (r/n)] where PMT is the periodic contribution. Most calculators do this for you — the value is understanding what's happening, not the arithmetic.