What is compound interest?
Compound interest is interest calculated on the initial principal added to the interest accumulated over previous periods—commonly known as "interest on interest." Unlike simple interest, where returns are always calculated on the original amount, compound interest earns returns on a growing balance each period, causing acceleration over time.
This is the standard model used in most long-term investments (savings accounts, CDs, bonds, funds) as well as accumulated debts such as credit card balances and overdrafts.
Compound interest formula
The base formula without monthly contributions is:
A = P × (1 + r)^t
- A: final amount
- P: initial principal
- r: interest rate per period (as a decimal)
- t: number of periods
With monthly contributions, the calculation occurs period by period: each month, the previous balance is multiplied by the rate and added to the new contribution, which then begins earning interest for the remaining duration. This calculator runs that complete calculation automatically.
Practical example
With an initial capital of $1,000, a monthly contribution of $200, and a rate of 1% per month for 5 years (60 months), the final balance reaches approximately $18,150. That represents over $5,150 earned purely in accumulated interest on a total investment of $13,000. Try testing different figures in the calculator above to see how subtle changes in rates or duration impact the end result.