Compound Interest Calculator
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Total Contributions
Total Interest Earned
The 8th Wonder of the World
"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."
While this famous quote is often attributed to Albert Einstein, its true origin is uncertain. What is certain, however, is its profound truth. Compound interest is the engine of wealth creation, and understanding it is fundamental to achieving your financial goals.
The Snowball Effect
Imagine a small snowball at the top of a snowy hill. As you give it a little push, it starts to roll. It picks up more snow, getting bigger and heavier. As it gets bigger, it picks up even more snow, even faster. Soon, that tiny snowball has become an unstoppable avalanche.
Your money works the exact same way with compound interest. Your initial investment is the small snowball. The interest it earns is the first layer of new snow. The next time interest is calculated, it's calculated on your original investment *plus* that first layer of interest. Your money starts earning money on itself, and the growth accelerates over time. This calculator's line chart perfectly illustrates this incredible snowball effect.
Frequently Asked Questions
What's the difference between simple and compound interest?
Simple interest is calculated only on the original principal amount. Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods. As a result, compound interest makes your money grow much faster.
What is a realistic interest rate to use?
This depends on your investment type. For a high-yield savings account, you might use 3-5%. For a diversified stock market portfolio (like an S&P 500 index fund), a historical average is around 8-10%, but it's often wise to use a more conservative estimate like 6-7% for planning, as past performance is not a guarantee of future results.
Why is starting early so important?
Time is the most crucial ingredient for compounding. The longer your money has to grow, the more periods of compounding it experiences, and the more dramatic the "snowball effect" becomes. Someone who starts investing a small amount at age 25 can easily end up with more than someone who invests a larger amount starting at age 35.