Compound interest calculator

What "compound" means

Simple interest is always calculated on the starting balance. Compound interest is calculated on the balance and on the interest already earned: each period starts from a slightly larger base than the one before. That accumulation is why a compound interest curve rises faster and faster instead of following a straight line.

The effect is small over a few years and very large over several decades. It is also why the gap between two nearby rates, say 4% and 6%, ends up producing results that bear no comparison: the difference does not add up, it multiplies.

A handy rule of thumb, the rule of 72: divide 72 by the annual rate to get the number of years it takes to double. At 6%, about twelve years. The approximation holds well for ordinary rates.

Why compounding frequency matters

Compounding means turning interest into capital. The more often that happens, the sooner the following interest is calculated on an increased base — and the higher the final result, at the same quoted rate.

The gap between annual and monthly compounding is modest over one year, but it accumulates too. That is why two products advertising the same rate do not return the same thing, and why the effective annual rate exists: it brings everyone back to a comparable basis.

What the calculation leaves out

The result is nominal: no inflation, no tax, no management fees. A balance growing 4% a year while prices rise 3% gains one point of purchasing power, not four.

The rate is assumed constant for the whole term. No equity investment behaves that way: the curve describes a steady average, not an actual path. To see what a market really did, year by year, the asset comparison tool is more honest than any projection.