# Compound interest calculator

This is the total amount you need to maintain your desired retirement lifestyle.

Thanks to compound interest you will gain this much. Einstein called compound percentages the 8th wonder of the world.

## What is compound interest?

Compound interest is the interest earned on both the initial amount and any accumulated interest from previous periods. This allows savings to grow faster as the interest is added to the principal amount either daily or monthly, increasing the total amount on which future interest is calculated.

For instance, if you deposit $10,000 in a savings account with a 5% annual interest rate compounded daily, you would earn $512 in interest in the first year. In the second year, you earn $538, and this pattern of increasing interest continues, reaching a total of $6,288 after ten years.

However, for long-term savings, options like Roth or traditional IRAs and CDs might be more beneficial than standard savings accounts.

## Compounding and investing

Investing in the stock market yields returns based on the changing value of your investments, not a fixed interest rate. If you reinvest your earnings, these returns compound similarly to interest.

For example, if you invest $10,000 in a mutual fund with a 7% annual return, you gain $700 the first year, making your investment worth $10,700. If it earns another 7% the next year, the value rises to $11,449.

Over long periods, this growth is significant. For instance, a $10,000 investment at a 7% annual return would grow to over $76,000 in 30 years within a retirement account.

However, returns can fluctuate daily and annually. Short-term, high-risk investments like stocks might lose value, but historically, diversified growth portfolios average around a 7% annual return over time. This compounding effect is crucial for achieving long-term savings and investment goals, significantly increasing your initial investment over decades.

## How does age impact compounding?

Starting to save early has a big impact on how much you can earn from compound interest. The sooner you begin, the more your interest has a chance to accumulate and generate additional interest over time. For instance, if you start saving at 25 instead of 35, you'll end up with a larger total by retirement—even if you're putting away the same amount each month.

By saving early, you also avoid the stress of needing to catch up later in life. Smaller, regular contributions can grow significantly thanks to the power of compound interest, making it easier to reach your financial goals and secure a comfortable retirement. This approach not only eases financial pressure but also boosts your overall savings potential.

Take a look at the below example and the table to see how age impacts compounding.

**Assumptions**:

Monthly savings: $100

Annual interest rate: 5%, compounded annually

No withdrawals

**Explanation**:

The earlier you start, the more your money grows due to interest compounding on both the initial principal and accumulated interest from prior years.

The difference in total savings is substantial when you compare someone who starts at 25 versus someone who starts at 45, primarily because the former has 20 more years for their investments to grow through compounding.

Starting Age | Total Saved by Age 65 |
---|---|

25 | $145,850 |

35 | $83,225 |

45 | $43,219 |

55 | $18,295 |

Assume each person saves $100 a month and earns an annual compound interest rate of 5%.

## The compound interest formula

The calculator above uses the compound interest formula to find principal plus interest. It uses this same formula to solve for principal, rate or time given the other known values. You can also use this formula to set up a compound interest calculator in Excel or in a Google Sheet.

**A = P(1 + r/n)**^{nt}

In the formula

A = final amount

P = initial principal balance

r = interest rate

n = number of times interest applied per time period

t = number of time periods elapsed

Writer

Charlie Barton is a writer at Unbiased. He has been writing about personal finance and investing since 2017, with extensive knowledge of platforms and products. Charlie has a first-class degree from the London School of Economics.