Compound interest formula
- A = final amount, P = starting amount
- r = annual interest rate as a decimal (7% = 0.07)
- n = compounding periods per year (12 for monthly)
- t = years
Example: 10,000 at 7% compounded monthly for 10 years: A = 10,000 × (1 + 0.07 ÷ 12)^120 = 20,097. With simple interest, you'd have 17,000. The extra 3,097 is interest earned on interest.
With monthly contributions, each deposit is added at the end of the month and grows at the equivalent monthly rate from then on.
Does compounding frequency matter?
| 10,000 at 7% for 10 years | Final amount | Effective annual rate |
|---|---|---|
| Yearly | 19,672 | 7.000% |
| Quarterly | 20,016 | 7.186% |
| Monthly | 20,097 | 7.229% |
| Daily | 20,136 | 7.250% |
More frequent compounding helps, but less than people expect. The rate and the time matter far more. When comparing savings accounts or deposits, compare the effective annual rate (also called AER or APY), which already includes the compounding.
The rule of 72
To estimate how long money takes to double, divide 72 by the annual rate. At 6%, about 12 years; at 9%, about 8 years; at 12%, about 6 years. It's an approximation, accurate within a few months for rates between about 4% and 15%.
Things the formula ignores
- Tax: interest on deposits is usually taxable each year, which reduces the effective growth.
- Inflation: a 7% return with 5% inflation grows your buying power by only about 2% a year.
- Variable rates: savings rates change. This tool assumes a constant rate.
For monthly investments in market-linked funds, the SIP calculator uses the same compounding maths, with a step-up option.
Frequently asked questions
What is compound interest?
What's the difference between simple and compound interest?
How often do fixed deposits compound in India?
What is the effective annual rate?
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