Compound Interest: The 8th Wonder of the World

What is Compound Interest?

Compound interest is the process where the interest you earn on an investment is added to the principal amount, and this new, larger principal then earns interest itself. This "interest on interest" effect causes your wealth to grow at an accelerating, exponential rate, which is especially powerful over long periods.

The Compound Interest Formula

This calculator uses the future value formula that includes regular contributions:

A = P(1 + r/n)^nt + PMT × [ ((1 + r/n)^nt - 1) / (r/n) ]

• A: The future value of the investment/loan, including interest.
• P: The principal investment amount (the initial deposit).
• PMT: The monthly contribution.
• r: The annual interest rate (in decimal form).
• n: The number of times that interest is compounded per year.
• t: The number of years the money is invested for.

Tips for Maximizing Compound Growth

To make the most of compound interest, remember three golden rules:

• Start as early as possible: Time is your greatest asset. Starting early, even with a small amount, can make a huge difference in the long run.
• Invest regularly and be disciplined: Making consistent contributions significantly accelerates the growth of your investment.
• Optimize your interest rate: Seek out safe investments with competitive interest rates. Even a small increase in your rate can lead to massive gains over many years.