How Compound Interest Works
Compound interest is often called the "eighth wonder of the world." Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal plus the accumulated interest.
The Formula
We use the standard financial formula:
A = P(1 + r/n)^(nt)
- A: The future value of the investment
- P: The principal investment amount
- r: The annual interest rate (decimal)
- n: The number of times interest is compounded per year
Frequently Asked Questions
What is a good rate of return?
The S&P 500 has historically returned about 10% annually before inflation. High-Yield Savings Accounts (HYSA) typically offer 4-5%.
Does this calculator account for inflation?
This specific tool shows "nominal" returns. To see your purchasing power, subtract the inflation rate (avg 3%) from your expected return.