Compound Interest Calculator SmartAsset

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):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Compound Interest?

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It's often called "interest on interest" and can make money grow faster than simple interest.

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/loan
$ P $ — Principal investment amount
$ r $ — Annual interest rate (decimal)
$ n $ — Number of times interest is compounded per year
$ t $ — Time the money is invested/borrowed for, in years

Explanation: The formula accounts for periodic compounding where interest is added to the principal at regular intervals, resulting in exponential growth.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investment decisions, and debt management. It demonstrates how investments grow over time and the true cost of borrowing.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage (e.g., 5 for 5%), number of compounding periods per year, 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 amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How often is interest typically compounded?
A: Common compounding frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).

Q3: Does compounding frequency make a big difference?
A: Yes, more frequent compounding results in higher returns. For example, $10,000 at 5% for 10 years: annually = $16,289, monthly = $16,470.

Q4: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your money at that rate.

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