Compound Interest Calculator

Understanding the Compound Interest Calculator

Compound interest is often called the eighth wonder of the world, and this calculator is designed to show you why. It demonstrates how a consistent investment can grow exponentially over time, as you begin to earn returns not just on your initial principal, but on the accumulated interest as well. This tool helps you visualize your potential long-term wealth.

How It Works

The calculator projects the future value of an investment based on several key factors:

• Initial Investment: The starting amount of your investment (principal).
• Monthly Contribution: The additional amount you plan to invest each month.
• Time Horizon: The number of years you plan to let your investment grow.
• Estimated Annual Return: The average annual rate of return you expect on your investment.
• Compound Frequency: How often the interest is calculated and added to your balance (e.g., annually, monthly).

The Formula for Compound Interest

The calculator uses an iterative approach to account for monthly contributions, but the core calculation is based on the future value formula:

FV = P(1 + r/n)^(nt)

Where: FV = Future Value, P = Principal amount, r = Annual interest rate, n = number of times interest is compounded per year, and t = number of years.

By observing the chart, you can clearly see the difference between your total contributions and the total balance, with the gap between them representing the interest earned—the money your money has made for you.

Frequently Asked Questions