Simple vs Compound Interest
Simple Interest is calculated only on the original principal. Example: $10,000 at 7% for 5 years = $3,500 interest.
Compound Interest earns interest on interest. This is why Albert Einstein reportedly called it the "eighth wonder of the world."
Key Concepts
- Compounding Frequency: More frequent compounding (daily > monthly > annually) leads to higher returns because interest is added more often.
- Rule of 72: A quick way to estimate how long it takes for money to double: 72 รท Interest Rate. Example: At 8%, money doubles in about 9 years.
- Tax on Interest: Reduces your real returns. A 25% tax rate means you only keep 75% of the interest earned.
- Inflation: Reduces the purchasing power of your money over time. Always compare your return rate to inflation.
How This Calculator Works
We use the standard compound interest formula with regular contributions. The ending balance is projected year by year, applying interest and adding contributions at the chosen frequency. Tax is applied to interest each period, and inflation adjusts the final real value.