Understanding Compound Interest

Compound interest is the interest you earn on both your original principal and the accumulated interest from previous periods. In simpler terms, it's "interest on interest." Instead of earning a flat amount each year, your earnings start to generate their own earnings.

For example, if you invest $1,000 at 10% annual interest, you earn $100 the first year. The next year, you earn 10% on $1,100, which is $110. This snowball effect is what makes compounding so powerful for long-term investors.

The two most important factors for maximizing compound interest are:

• Time: The longer your money stays invested, the more time it has to compound and grow exponentially. This is why financial advisors stress the importance of starting to invest as early as possible.
• Rate of Return: A higher rate of return will accelerate the compounding process. This is influenced by the types of assets you invest in (e.g., stocks vs. bonds).

Regular contributions also play a huge role, as they continuously add fuel to the compounding engine.

To see compounding in action, enter the following into our calculator:

• Initial Principal: Enter your starting investment amount.
• Monthly Contribution: Add any regular monthly investments.
• Annual Interest Rate (%): Input the expected annual interest rate.
• Investment Period (Years): Set the duration of the investment.
• Compounding Frequency: Choose how often the interest is compounded (e.g., monthly, annually).
• Calculate: See how your investment grows over time, visualized in a chart.