How compound interest works
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only earns on the original amount, compound interest accelerates growth because you earn "interest on interest." The more frequently interest compounds, the faster your money grows.
The compound interest formula
Without contributions: A = P × (1 + r/n)n×t, where P is principal, r is annual rate (decimal), n is compounding frequency per year, and t is time in years. With regular monthly contributions, each deposit is compounded for its remaining time, producing the future value of an annuity component added to the lump-sum growth.
Why compounding frequency matters
Daily compounding yields slightly more than annual compounding for the same rate and time. For large balances or long time horizons, this difference can be significant. Our calculator lets you compare annually, semi-annually, quarterly, monthly, and daily compounding side by side.