Compound interest is simple to say and powerful to live with. You earn interest on your money, and then you earn interest on that interest. Do this for enough years and the numbers start to climb faster than you expect.

If you want to check your own numbers, our Compound interest calculator does the work for you. Below, I'll explain how it works so the result makes sense.

What is compound interest?

Say you put $1,000 in a savings account that pays 5% a year. After one year you have $1,050. In year two, the 5% is paid on $1,050, not on the original $1,000. So you earn $52.50 instead of $50.

That small gap is compounding. It looks tiny in year two. In year twenty it is big.

The compound interest formula

Here is the formula:

A = P × (1 + r / n) ^ (n × t)

• A is the final amount

• P is the money you start with

• r is the yearly interest rate, written as a decimal (6% becomes 0.06)

• n is how many times a year the interest is added

• t is the number of years

You don't need to do this by hand. But it helps to know what the Calculators is doing.

An example with real numbers

Let's say you invest $5,000 at 6% a year, compounded once a year, for 10 years.

A = 5,000 × (1.06)^10 = about $8,954

So your money earned about $3,954 in interest.

Compound interest vs simple interest

Simple interest is paid only on the money you started with. Using the same example, 6% simple interest on $5,000 is $300 a year. After 10 years that is $3,000, and your total is $8,000.

With compound interest you end up with $8,954. That is almost $1,000 more, with no extra effort from you. The longer the time, the bigger the gap.

Does compounding frequency matter?

Yes, but less than most people think. The more often interest is added, the more you earn. Take the same $5,000 at 6% for 10 years:

• Compounded yearly: about $8,954

• Compounded monthly: about $9,097

Monthly compounding gives you around $143 more. This is also why you will see APY (annual percentage yield) on bank accounts. APY shows what you really earn in a year after compounding. A 6% rate compounded monthly works out to an APY of about 6.17%.

When you compare savings accounts, look at the APY. It lets you compare them fairly.

How to grow your money faster

You can't control the interest rate, but you can control three things:

1. Start early. Time does most of the work. Ten extra years often matters more than a bigger deposit.

2. Add money often. Even $50 a month adds up, because each deposit starts earning too.

3. Leave it alone. Every time you take money out, you lose the interest it would have earned.

How to use the calculator

1. Enter the money you are starting with.

2. Enter the yearly interest rate.

3. Choose how often interest is added.

4. Enter the number of years, and any regular deposits you plan to make.

5. Read your final amount and the interest earned.

Try a few different numbers. Change the years from 10 to 20 and see what happens. It is a good way to see why starting early matters.

Common questions

Is compound interest good or bad? It depends on which side you are on. It is great when you are saving or investing. It works against you when you have credit card debt, because the interest keeps adding to what you owe.

How often is interest usually compounded? It depends on the account. Many savings accounts compound daily or monthly. The terms of your account will tell you.

Can I use this for loans? For savings and investment growth, yes. If you want to know what a loan costs each month, use a loan calculator instead.

Keep going

This calculator is one of many tools on Advanced calculators site. If you like working with money numbers, take a look at our other finance calculators too.