Compound Interest

Personal Finance
Updated Apr 2026 • Has calculator

Earning interest on both principal and previously earned interest.

What is Compound Interest?

Compound interest is interest calculated on the initial principal plus the accumulated interest from prior periods. Unlike simple interest, which is earned only on the principal, compounding causes balances to grow exponentially over time. The frequency of compounding — daily, monthly, quarterly, annually — determines how quickly the balance grows. Albert Einstein reportedly called compound interest the "eighth wonder of the world," and it is the foundational mechanism behind long-term wealth building through savings and investments.

Formula

FV = P × (1 + r/n)^(n×t) + M × ((1 + r/n)^(n×t) − 1) / (r/n)

Worked Example

Worked example — S&P 500 Index (illustrative)

20-year horizon

Step 1  Starting amount: $10,000
Step 2  Annual return: 7% (historical S&P 500 real return)
Step 3  Monthly contribution: $500
Step 4  Investment period: 20 years
Step 5  FV = $10,000×(1.00583)^240 + $500×((1.00583)^240−1)/0.00583
Step 6  = $38,697 + $260,927 = $299,624
Step 7  → Of the $299,624 total, only $130,000 was contributed — compounding added $169,624

Source: SEC Investor Education (2024-01-01)

Calculate Compound Interest

US stock market has averaged ~7% real return historically

Set to 0 to calculate lump-sum growth only

Future Value

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Not investment advice.

How to Interpret Compound Interest

< 10000
Early stage — keep contributing consistently
10000 – 100000
Growing — compounding is starting to show
100000 – 500000
Substantial — time and rate are working for you
> 500000
Significant wealth — compounding at full power
Sources
  1. Investopedia — Compound Interest
  2. SEC Investor Education