Compound Interest Calculator Nerdwallet

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Principal Amount (P):

USD

Annual Interest Rate (r):

Compounds Per Year (n):

Time (t):

years

Future Value (A):

Total Interest Earned:

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Compound Interest?

Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods. It causes wealth to grow faster than simple interest which is calculated only on the principal amount.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Where:

\( A \) — Future value of the investment
\( P \) — Principal investment amount
\( r \) — Annual interest rate (decimal)
\( n \) — Number of times interest is compounded per year
\( t \) — Time the money is invested for (in years)

Explanation: The formula accounts for periodic compounding by dividing the annual rate by the number of compounding periods and raising the result to the power of total periods.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for retirement planning, investment strategies, and debt management. It demonstrates how small, regular investments can grow significantly over time.

4. Using the Calculator

Tips: Enter principal in USD, annual rate as percentage (e.g., 5 for 5%), compounding frequency (e.g., 12 for monthly), and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal, while compound interest is calculated on principal plus accumulated interest.

Q2: How does compounding frequency affect results?
A: More frequent compounding (daily vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What's the Rule of 72?
A: A quick way to estimate doubling time: divide 72 by the interest rate. At 6%, money doubles in about 12 years.

Q4: Are there limitations to this calculation?
A: This assumes constant rate and regular compounding. Real-world investments may have variable rates and additional factors.

Q5: How can I maximize compound interest?
A: Start early, invest regularly, reinvest dividends, and choose accounts with higher compounding frequencies.