Compound Interest Calculator
Compound interest is interest calculated on both the original principal and the accumulated interest from previous periods, meaning your returns generate their own returns over time. The formula is A = P(1 + r/n)^(nt), where P is principal, r is the annual rate, n is compounding frequency per year, and t is time in years. The more frequently interest compounds (daily vs monthly vs annually), the faster your balance grows. The Rule of 72 gives a quick estimate: divide 72 by the annual rate to find the years needed to double your money (e.g. 72 ÷ 6% = 12 years). In an Australian context, compound growth is central to superannuation, the earlier contributions are made, the longer they compound before preservation age. This calculator handles lump-sum investments, regular contributions, varying compounding frequencies, and shows a year-by-year growth breakdown.
Year-by-Year Breakdown
| Year | Balance at Year End | Interest Earned This Year | Total Contributions to Date |
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Frequently Asked Questions
What is compound interest?
Compound interest is interest calculated on both your initial deposit (the principal) and on any interest that has already been added to your balance. This creates a snowball effect where your money grows exponentially rather than linearly. For example, $10,000 at 7% annual return grows to $10,700 in year 1, then $11,449 in year 2 because you earn 7% on $10,700, not just the original $10,000. The longer your money is invested, the more powerful this compounding effect becomes.
What is the difference between simple and compound interest?
Simple interest is calculated only on your original principal amount throughout the entire term. Compound interest, however, is calculated on the principal plus any accumulated interest, meaning you earn interest on your interest. For savings and investments, compound interest works in your favour; for loans and credit cards, it works against you. Understanding this distinction is crucial for making informed financial decisions about borrowing and investing.
How often should I check my investments?
Research in behavioural finance consistently shows that checking your investments less frequently helps reduce emotional decision-making, which often leads to poor outcomes. Constant monitoring can trigger anxiety-driven reactions to short-term market fluctuations, causing investors to buy high and sell low. Annual or semi-annual reviews are sufficient for most long-term investors, allowing you to rebalance if your asset allocation has drifted significantly from your target without reacting to short-term volatility.
What is a good average return for investments?
The global share market has historically returned approximately 7-10% per year over long periods when dividends are included. A diversified balanced portfolio might reasonably expect 5-7% after inflation. Returns vary significantly year to year, and trying to time the market or move to cash during downturns typically destroys the compounding effect that makes long-term investing powerful.
What is the Rule of 72?
The Rule of 72 is a quick mental math shortcut to estimate how many years it takes for your investment to double: simply divide 72 by your annual return rate. At 6% return, your money doubles in roughly 72 divided by 6, which equals 12 years. At 8%, it doubles in about 9 years. This rule also works in reverse for debt: at 18% credit card interest, a balance doubles in just 4 years if unpaid.
Does compound interest work against you with debt?
Yes, absolutely. Credit card debt compounds against you in the same mathematical way it works for investments. A $5,000 credit card balance at 20% annual interest that goes unpaid will double to $10,000 in approximately 3.6 years purely through compound interest. This is why paying more than the minimum on high-interest debt should typically be your first financial priority before investing. The effective interest rate you pay on debt almost always exceeds what you can reliably earn from investments.