Compound Interest Calculator

Compound interest is interest earned on interest already earned. Simple interest pays the same amount every period because it is always calculated on the original balance; compound interest recalculates on the balance including everything added so far, so each period's earnings are slightly larger than the last.

The effect is invisible early and dominant late. Over thirty years at a typical equity return, most of a portfolio's final value comes from compounding rather than from contributions, which is why the year you start matters more than the amount you start with.

Yes, but far less than people expect. At a nominal 10%, annual compounding returns exactly 10% over a year while monthly compounding returns 10.47% and daily 10.52%. The gain from compounding more often shrinks quickly and converges on a ceiling, so the difference between monthly and daily is negligible.

The rate itself and the number of years both matter enormously more. A one-point difference in rate over thirty years outweighs any change in frequency.

A projection in nominal dollars overstates what the money will buy. At 3% inflation, purchasing power halves roughly every 24 years, so a balance projected thirty years out is worth about 41% of its face value in today's terms.

Planning against the nominal number is the most common way a long projection misleads. The inflation-adjusted line is the one to compare against your current expenses, since those are quoted in today's dollars.

The effective annual rate is what the nominal rate actually earns once compounding within the year is counted. It is the nominal rate divided by the number of periods, compounded that many times, minus one.

It exists so two products quoting different compounding frequencies can be compared honestly. When a rate is advertised as nominal, the effective rate is the one that tells you what you will receive.