Compound Interest Explained With Simple Examples

Compound interest means you earn interest not just on the money you put in, but also on the interest it has already earned. Over time this snowballs: 1,000 at 5% a year becomes 1,628.89 after 10 years without adding anything. Add 100 every month and it becomes about 17,175. The Compound Interest Calculator shows how your own savings could grow, year by year.

How does compound interest work?

Compare two ways of earning 5% on 1,000:

• Simple interest pays 5% of the original 1,000 every year: 50 a year, 1,500 after 10 years.
• Compound interest adds each year's interest to the balance, so the next year's 5% is on more money: 1,050, then 1,102.50, then 1,157.63… and 1,628.89 after 10 years.

The difference, about 129, comes purely from interest earning interest. Over 30 or 40 years the gap becomes enormous.

What is the formula?

For a single deposit:

A = P × (1 + r/n)^(n × t)

• A: the final amount
• P: the starting amount
• r: the yearly rate as a decimal (5% = 0.05)
• n: how many times a year interest is added (1 = yearly, 12 = monthly, 365 = daily)
• t: the number of years

Example: 1,000 × (1 + 0.05/1)^(1 × 10) = 1,000 × 1.6289 = 1,628.89.

Regular deposits add a second part to the formula. The calculator handles that for you.

Worked examples

Starting amount	Added monthly	Rate	Compounded	Years	Final balance	You put in	Interest earned
1,000	0	5%	Yearly	10	1,628.89	1,000	628.89
1,000	100	5%	Monthly	10	17,175.24	13,000	4,175.24
1,000	100	7%	Monthly	30	130,113.60	37,000	93,113.60

Look at the last row: you put in 37,000, and interest adds more than twice that. Time is doing most of the work.

Why does starting early matter so much?

Because growth speeds up in the later years. In the third example, a large share of the interest arrives in the last decade. Starting 10 years later means losing those biggest years, and you'd have to deposit far more each month to catch up. If you can only save a small amount, starting now beats waiting until you can save more.

How do you use the calculator?

1. Open the Compound Interest Calculator.
2. Enter your starting amount.
3. Enter the amount added every month (optional).
4. Enter the yearly interest rate and the number of years.
5. Choose how often interest is compounded: yearly, quarterly, monthly or daily.
6. Read the final balance, the total you put in and the interest earned, plus a year-by-year table. Use Copy results to paste them anywhere.

It works in any currency and runs entirely in your browser.

Which rate should you use?

Use a realistic rate for where the money will be:

• Savings accounts and fixed deposits pay a known rate, but it can change when the deposit renews.
• Investments such as stock funds have no fixed rate. Their returns go up and down, and long-run averages are not guaranteed. Use a cautious figure.
• Inflation reduces what your money can buy. To see growth in today's money, subtract expected inflation from the rate.

Tax on interest or gains also lowers the final amount. This guide is educational, not investment advice.

Does compounding frequency matter?

Less than people think. At 5% a year:

• yearly compounding gives 5.00% a year,
• monthly gives about 5.12%,
• daily gives about 5.13%.

The rate, how much you add and how long you leave it matter much more. When comparing accounts, look at the effective yearly rate (often called APY or AER), which already includes compounding.

The other side: compound interest on debt

The same snowball works against you on loans and credit cards. Unpaid interest is added to what you owe, and then charged interest itself. Paying off high-interest debt is often the best "return" you can get. See how loan interest adds up in how EMI is calculated and how mortgage amortization works.

Try your own numbers

Open the free Compound Interest Calculator and change the years or monthly amount to see the effect. For loans, use the EMI Calculator; for quick percent questions, the Percentage Calculator.