Compound Interest Calculator

How compound interest is actually calculated

Compound interest pays you on your interest. Each period, your balance earns a return, that return joins the balance, and the next period’s return is calculated on the larger number. The standard formula for a lump sum is:

A = P(1 + r/n)^nt — where P is your starting principal, r is the annual rate as a decimal, n is how many times per year interest compounds, and t is years.

When you also add money every month, the calculator runs a second term for that stream of deposits. This tool compounds monthly and assumes each contribution lands at the end of the month, which is the conservative assumption — contributions made at the start of the month would earn slightly more.

A worked example

Say you start with $5,000, add $200 every month, and earn 7% annually for 20 years. You’d finish with roughly $124,379. Of that, only $53,000 is money you actually deposited — the other $71,379 is interest. Compounding contributed more than your own contributions did.

Now shorten that to 10 years instead of 20. The balance drops to about $44,700, and interest accounts for only around $10,700 of it. Halving the time didn’t halve the result — it cut the interest portion by roughly 85%. That non-linearity is the entire argument for starting early.

When this calculator is the right tool

Use it for any account where returns get reinvested rather than paid out: a high-yield savings account, a brokerage account holding index funds, a 401(k), a Roth IRA, or a CD you intend to roll over. It answers “what does consistent investing turn into?”

It’s the wrong tool for debt. Credit card interest compounds against you, and payoff math works differently — use the debt payoff calculator for that. If you want to model a contribution amount that rises each year, the recurring investment calculator handles annual step-ups.

Common mistakes people make with this math

• Using an optimistic rate. 7% is a reasonable long-run, inflation-adjusted figure for a diversified stock portfolio. Plugging in 12% because last year was good will badly overstate your result.
• Forgetting that returns aren’t smooth. This calculator applies the same rate every year. Real markets don’t — they deliver that average through a mix of strong and negative years.
• Ignoring fees. A 1% annual expense ratio doesn’t cost you 1%. Over 30 years it can consume a fifth or more of your ending balance, because every dollar in fees is also a dollar that stops compounding.
• Treating the output as a promise. It’s a projection built on assumptions you chose, not a forecast.

What this calculator doesn’t account for

Results are nominal and pre-tax. Taxes on gains in a regular brokerage account, inflation eroding purchasing power, fund expense ratios, and any withdrawals you make along the way are all excluded. In a tax-advantaged account like a Roth IRA the tax gap mostly disappears, but inflation still applies. A practical shortcut: use a rate about 2-3 points below your expected nominal return to get a rough “in today’s dollars” figure.