- What is Compound Interest?
- How is Compound Interest Calculated?
- Why Does Compound Interest Matter?
- Simple Interest vs Compound Interest
- How Often is Interest Compounded?
- How Can Compound Interest Benefit You?
- How Can Compound Interest Work Against You?
- How to Create a Compound Interest Calculator in Excel
Want to see how your savings grow over time or how interest affects your loan repayments? Our Compound Interest Calculator helps you quickly estimate your future savings, investment returns, or loan interest costs.
Compound interest is a powerful financial tool—it can significantly boost your wealth over time when saving or investing, but it can also increase your debt if not managed properly. Whether you're saving for retirement, investing in shares, or comparing home loans, understanding compound interest gives you a financial advantage.
So, what is compound interest? How does it work? And how can you use it to your benefit? Here’s everything you need to know.
What is Compound Interest?
Compound interest is interest on interest—meaning you earn interest not only on your original deposit (principal) but also on any accumulated interest. This leads to exponential growth over time.
For example
You deposit $1,000 in a savings account offering 5% annual interest, compounded yearly.
- Year 1: You earn $50 (5% of $1,000), bringing your total to $1,050.
- Year 2: You earn 5% on $1,050, which is $52.50, making your total $1,102.50.
- Year 3: You earn 5% on $1,102.50, and so on.
Over time, your savings grow faster because the interest continues to accumulate.
How is Compound Interest Calculated?
The formula for compound interest is:
A = P (1 + r/n)^(nt)
Where:
- A = Final amount
- P = Principal (initial deposit or loan amount)
- r = Annual interest rate (in decimal form)
- n = Number of times interest is compounded per year
- t = Number of years
For example
You invest $5,000 at an 8% annual interest rate, compounded quarterly for 10 years.
Using the formula:
A = 5000 × (1 + 0.08 ÷ 4)^(4 × 10)
After 10 years, your investment will grow to about $10,965—more than double your initial deposit!
Try our Compound Interest Calculator to instantly see how different interest rates and time periods affect your savings.
Why Does Compound Interest Matter?
The biggest advantage of compound interest is time. The earlier you start saving or investing, the more time your money has to grow.
- John starts investing at 25, contributing $200 per month for 30 years. By 55, he has $293,219.
- Emily starts investing at 35, contributing $300 per month for 20 years. By 55, she has $176,125.
Even though Emily contributes more each month, John ends up with more money—because his investments had more time to grow.
Simple Interest vs Compound Interest
While both simple and compound interest involve earning or paying interest, the key difference is how the interest accumulates.
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| How It Works | Interest is earned only on the original amount | Interest is earned on both the principal and previous interest |
| Formula | A = P (1 + rt) | A = P (1 + r/n)^(nt) |
| Growth Speed | Slower | Faster |
| Example | A $1,000 deposit at 5% for 10 years earns $500 | A $1,000 deposit at 5% for 10 years earns $628 |
What should you choose? Compound interest or simple interest?
If you're borrowing money, simple interest is better because you only pay interest on the original loan amount. This is why car loans and personal loans often use simple interest.
If you're saving or investing, compound interest is better because it allows your wealth to grow exponentially over time.
How Often is Interest Compounded?
The frequency of compounding affects how fast your money grows.
| Compounding Frequency | Effect on Growth |
|---|---|
| Daily | Fastest growth |
| Monthly | Slower than daily but still strong |
| Quarterly | Moderate growth |
| Annually | Slowest growth |
You invest $1,000 at 6% interest for 10 years.
- Annually compounded: Final amount = $1,791
- Monthly compounded: Final amount = $1,822
- Daily compounded: Final amount = $1,819
The more frequently interest is compounded, the more you earn!
How Can Compound Interest Benefit You?
Compound interest is a powerful tool for:
- Boosting savings – The earlier you save, the more your wealth grows.
- Growing superannuation – Retirement funds benefit massively from compounding over decades.
- Maximising investments – Stocks, property, and bonds use reinvestment to build long-term wealth.
For example
If you start investing $200/month at age 25 with an 8% return, by retirement at 65, you’ll have over $600,000. If you wait until 35, you’ll have only $270,000!
Even small investments can turn into big wealth over time. The key is starting early and being consistent.
How Can Compound Interest Work Against You?
While compound interest helps grow savings, it can also increase your debt if not managed properly—especially with credit cards and high-interest loans.
For example
You have a $5,000 credit card balance with a 20% interest rate, compounded monthly. If you only pay the minimum each month, you could end up paying thousands in extra interest over time.
Tip: Always pay more than the minimum on loans and credit cards to reduce interest costs.
How to Create a Compound Interest Calculator in Excel
Want to track your savings and investments in Excel? Follow these steps:
Step 1: Set Up Your Excel Sheet
Open Excel and label your columns:
| A | B |
|---|---|
| Principal Amount ($) | 10,000 |
| Annual Interest Rate (%) | 5 |
| Compounding Frequency (Times Per Year) | 12 |
| Years | 20 |
| Future Value ($) | (Formula Here) |
Step 2: Enter the Compound Interest Formula
In Cell B5 (Future Value), enter this formula:
=B1*(1+(B2/100)/B3)^(B3*B4)
Explanation of the formula:
- B1 = Initial deposit
- B2 = Annual interest rate
- B3 = Compounding frequency (12 for monthly, 4 for quarterly, etc.)
- B4 = Number of years
Step 3: Create a Yearly Growth Table (Optional)
To track year-by-year growth, use this formula in row 7:
=B1*(1+(B2/100)/B3)^(B3*A7)
Drag the formula down to calculate for each year.
Step 4: Visualise the Growth
- Highlight your data → Click "Insert Chart" → Select "Line Chart"
- Change B1 to B4 values to test different interest rates and durations
Whether you're saving, investing, or comparing loan options, understanding compound interest can help you make smarter financial decisions.
Want to see how much your savings will grow? Try our Compound Interest Calculator now!
