What is compound interest?
Compound interest is interest calculated on the initial principal plus the accumulated interest from previous periods. The earlier you start, the more dramatic the effect — Einstein (probably) called it the eighth wonder of the world.
The compound interest formula
A = P(1 + r/n)nt + PMT × [((1 + r/n)nt − 1) / (r/n)]
Where A is the future value, P is the principal, r is the annual rate (decimal), n is compounding periods per year, t is years, and PMT is the monthly contribution.
Why starting early matters
Consider two savers: Sarah starts at 25 with $100/month, Mike starts at 35 with $200/month. Both retire at 65 with the same 7% return. Sarah ends up with ~$264,000, Mike with ~$227,000 — Sarah wins even though she contributed half as much. That's the magic of compound interest.
Frequently asked questions
What is compound interest?
Interest calculated on the initial principal plus accumulated interest from previous periods. The earlier you start, the more dramatic the effect.
How often does interest compound?
Savings accounts: daily or monthly. Bonds: semi-annually. Stocks: dividends reinvested can compound.
How accurate is this calculator?
Mathematically exact for the inputs you provide. Real returns vary with market conditions, fees, and tax.