How compound interest works
With simple interest you only earn interest on the money you put in. With compound interest, the interest is added to your balance and then earns interest itself. The longer you leave your money invested, the bigger this effect becomes, which is why starting early matters so much.
The compound interest formula
For a single deposit, the future value is:
A = P × (1 + r ÷ n)n × t
- A: the final amount
- P: the starting amount
- r: the annual interest rate as a decimal
- n: how many times interest is compounded per year
- t: the number of years
This calculator also adds your monthly contributions at the end of each month and compounds them at the same rate, which is how most savings plans and retirement accounts work.
Example
$10,000 invested at 7% compounded monthly, plus $200 a month for 20 years, grows to about $144,573. You contribute $58,000; the remaining $86,573 is interest.
How to make compound interest work for you
- Start early. Ten extra years can matter more than a higher contribution.
- Contribute regularly. Small automatic monthly amounts add up.
- Keep fees low. A 1% yearly fee compounds against you, just like interest compounds for you.
- Reinvest your returns instead of withdrawing them.