How compound interest is calculated
Compound interest is interest earned on both your original principal and on the interest already added to it. The more often interest compounds and the longer you stay invested, the more pronounced the effect — which is why time in the market usually matters more than the size of any single contribution.
This calculator compounds at the frequency you choose and adds your monthly contribution each month. For accuracy it converts your nominal rate into an effective monthly rate, so quarterly, daily, and annual compounding are handled consistently.
EAR = (1 + r/n)^n − 1 → monthly rate i = (1 + EAR)^(1/12) − 1
balanceₜ₊₁ = balanceₜ × (1 + i) + monthly contribution
Frequently asked questions
- Does compounding frequency really change the outcome?
- Yes, but less than most people expect. Going from annual to daily compounding at the same nominal rate adds a modest amount; the rate and time horizon dominate.
- What return rate should I use?
- A long-run diversified equity portfolio has historically returned roughly 7% after inflation, but past performance is no guarantee — and a bad run of years early on can permanently lower your outcome. Model several rates, not just the optimistic one.
- Is this financial advice?
- No. It is an educational tool. The biggest risk it cannot show you is downside volatility — see the note in the sidebar.
This calculator is for educational purposes only and does not constitute financial, tax, or investment advice. Results assume a constant return rate and reinvested earnings; real markets fluctuate.