How compound interest grows your money
With compound interest, the interest you earn is added to your balance and starts earning interest of its own. In the first years the effect is small: almost all of your balance is money you put in. Give it time and the curve bends upward, until the interest earned each year is bigger than your contributions. The chart above shows that crossover: blue is the money you deposited, orange is growth.
The compound interest formula
For a single deposit, the future value is
A = P × (1 + r/n)n × t
P is the starting amount, r the annual rate, n how many times a year interest is compounded and t the number of years. This calculator also adds a deposit at the end of every month and grows each one from the month it goes in, so it handles regular saving too.
An example
Start with $10,000, add $500 a month and earn 7% a year compounded monthly. After 20 years you'd have about $301,000. You put in $130,000; the other roughly $171,000 is interest. Wait 30 years instead of 20 and the balance passes $690,000, more than double, for just $60,000 more in deposits.
Three things that matter most
- Time. Starting ten years earlier usually beats saving much more later, because early deposits get the most years to compound.
- Rate of return. The difference between 4% and 7% over 30 years is enormous. Keep fees low: a 1% yearly fee comes straight off your rate.
- Consistency. Automatic monthly contributions keep the snowball rolling through good and bad markets.
The rule of 72
A quick way to estimate doubling time: divide 72 by the annual rate. At 6% money doubles in about 12 years; at 8%, about 9 years. It's an approximation, but handy for comparing options in your head.
Keep in mind
Savings accounts and CDs pay a known rate, but investment returns vary from year to year and aren't guaranteed. Results here are before taxes and inflation; to see roughly what the balance would buy in today's money, subtract your expected inflation rate (around 2–3%) from the interest rate.