What is compound interest
Compound interest is the mechanism by which the interest earned on an investment is added to the principal and, from that point on, also earns interest itself. Unlike a fixed amount always calculated on the same base, compound interest makes your money grow at an accelerating pace the longer it stays invested — it's the foundation of almost every long-term saving and investing strategy.
The earlier you start investing and the more frequent the compounding, the stronger the cumulative effect. That's why time is, together with the interest rate, the single most important variable in this formula.
How to calculate compound interest step by step
Interezz's calculator simulates your investment period by period (monthly or daily, depending on the compounding frequency you choose):
- It starts from your initial capital.
- At every compounding period, it applies the corresponding interest rate to the accumulated balance.
- It adds the periodic contribution whenever it's due, based on the frequency you chose (monthly, quarterly, semiannual or annual).
- It repeats the process until the end of the term and records the balance at the close of each year.
This method (step-by-step simulation) is more precise than a single closed-form formula, because it lets you combine any contribution frequency with any compounding frequency without losing accuracy.
Simple interest vs. compound interest
| Simple interest | Compound interest | |
|---|---|---|
| Calculation base | Always the initial principal | Principal + accumulated interest |
| Growth | Linear | Exponential |
| Long-term result | Lower | Higher |
| Typical use | Short-term loans | Investments, term deposits, funds |
In the $5,000 at 6% annual for 10 years example, simple interest yields $8,000 while compound interest reaches $8,954 — a difference of nearly $1,000 based purely on how interest is calculated.
Frequently asked questions about currency and compounding
You can choose USD, EUR, ARS, GBP, BRL, CLP, MXN or COP. Currency only changes the symbol and number formatting — we do not convert real exchange rates, so enter your capital and contributions already expressed in the currency you pick. The compounding frequency (monthly, quarterly, semiannual, annual or daily) depends on the actual financial product you're simulating — check your bank or broker's terms to replicate the real scenario.