How Compound Interest Works
Compound interest is interest earned on both the original principal and on the interest that has already been added to it. Unlike simple interest, which is calculated only on the initial amount, compounding means your balance grows at an accelerating rate over time. The formula A = P(1 + r/n)^(nt) captures this: the annual nominal rate r is divided by the number of compounding periods n, and the exponent nt reflects how many total compounding periods occur over the full term.
The compounding frequency matters. If interest compounds annually, n = 1; if it compounds monthly, n = 12; if daily, n = 365. All else being equal, a higher compounding frequency produces a larger future value because interest begins earning its own interest sooner. This is why savings accounts and investment products advertise their compounding schedule alongside their nominal rate.
Reading the Result
The calculator reports the future value A — the total amount the principal grows to after the full term — and the total interest earned, which is simply the future value minus the original principal. In the default example, $10,000 invested at a 5% annual nominal rate compounded monthly for 10 years grows to roughly $16,470, of which about $6,470 is interest. The longer the term and the higher the rate, the larger the interest component becomes relative to the principal.
Practical Considerations
The annual nominal rate is the stated rate before compounding is applied; the effective annual rate is higher whenever n exceeds one. To compare products, look at the effective annual yield rather than the nominal rate. This calculator assumes a single initial deposit with no additional contributions — regular contributions would grow the balance further. Results are estimates for illustration and do not account for taxes, fees, or inflation.