How Compound Interest Works
Compound interest is the interest on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (calculated only on the principal), compound interest accelerates your wealth growth because your earnings generate their own earnings.
The Formula
For a lump sum with monthly compounding: FV = P(1 + r/12)^(12t), where P is the principal, r is the annual rate, and t is time in years. When monthly contributions (C) are added, the future value of the annuity component is: FV = C * [((1 + r/12)^(12t) - 1) / (r/12)]. The total future value is the sum of both.
Tips for Growing Your Investments
- Start early: Even small amounts benefit enormously from time in the market.
- Be consistent: Regular monthly contributions add up significantly over decades.
- Reinvest earnings: Letting your returns compound is the key to exponential growth.
- Keep costs low: High fees eat into your compound returns. Choose low-cost index funds when possible.
Related Tools
Use our Salary Calculator to determine your income, the Tax Calculator to find your after-tax pay, and the Budget Planner to decide how much you can invest each month.