COMPOUND INTEREST CALCULATOR

Compound interest is interest calculated on both your initial principal and the accumulated interest from previous periods. Unlike simple interest (which only applies to the original amount), compound interest allows your money to grow exponentially over time — often called "interest on interest." The more frequently interest compounds, the faster your balance grows.

More frequent compounding produces slightly higher returns. Daily compounding yields marginally more than monthly, which yields more than quarterly or annually. For example, $10,000 at 7% for 30 years grows to about $76,123 with annual compounding versus $81,165 with daily compounding. The difference is most noticeable at higher rates and longer time horizons.

The Rule of 72 is a quick mental math shortcut: divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 7%, your money doubles in roughly 72 ÷ 7 ≈ 10.3 years. At 10%, it doubles in about 7.2 years. This approximation works best for rates between 4% and 12%.

Increasing your contributions by 3-5% each year (often matching salary raises) significantly accelerates wealth building. Over 30 years, a 3% annual increase in contributions can add 40%+ to your final balance compared to flat contributions. This strategy also helps you keep pace with inflation without feeling a pinch in your budget.

Tax drag is the reduction in investment returns caused by taxes on dividends, interest, and capital gains during the holding period. In a taxable brokerage account, you may owe taxes on distributions each year, reducing the amount that compounds. Tax-advantaged accounts (Roth IRA, 401k) eliminate or defer this drag, which can result in 20-30% more wealth over 30+ years.

Tax-Free (Roth): Best if you expect higher taxes in retirement — no tax on growth or withdrawals. Tax-Deferred (Traditional 401k/IRA): Best if you expect lower taxes in retirement — tax deduction now, taxed on withdrawal. Taxable Brokerage: Most flexible but worst tax treatment — annual tax drag on distributions plus capital gains tax at sale. Maximize tax-advantaged space before using taxable accounts.

Inflation erodes purchasing power over time. A 7% nominal return with 3% inflation yields roughly 3.9% real return. Over 30 years, $1 million in future dollars may only buy what $412,000 buys today (at 3% inflation). Always check the inflation-adjusted balance to understand your true future purchasing power.

Yes, but the difference is modest. Investing at the beginning of each period (rather than the end) gives your money slightly more time to grow. Over 30 years with $500/month at 7%, beginning-of-period deposits yield roughly 0.6% more than end-of-period. The key takeaway: invest as early in each period as possible.