About the compound interest calculation
Compound interest means each period's interest is added to the balance, so the next period earns interest on a larger sum. The effect is slow at first and then accelerates sharply, which is why the last decade of a long investment usually produces more growth than the first two combined.
Formula
A = P × (1 + r/n)^(n × t)
P = starting amount
r = annual rate as a decimal
n = compounding periods per year
t = yearsWorked example
1,000 at 10% for 2 years compounded annually: 1,000 × (1.10)² = 1,210. Simple interest would give only 1,200 — the extra 10 is interest earned on the first year's interest.
Frequently asked questions
Does compounding frequency matter much?
Less than most people expect. At 12% for one year, annual compounding gives 1,120 on 1,000 while daily gives 1,127. Frequency has a real but modest effect; the rate and the time horizon matter far more.
What is the rule of 72?
Divide 72 by the annual percentage rate to approximate how many years it takes to double. At 8% that is about 9 years. It is accurate enough for mental arithmetic between roughly 6% and 10%.
Does compounding work against me too?
Yes, and identically. Credit card debt at 36% compounded monthly roughly doubles in two years if untouched. The same mathematics that builds wealth on the asset side destroys it on the liability side.
Should I use a nominal or real rate?
If you want the answer in today's purchasing power, subtract inflation from your rate before entering it. A 10% return with 6% inflation is roughly a 4% real return — see our inflation calculator.
Sources
- Standard compound interest formula