## What does the compound interest calculator calculate?

The chart above shows the growth of your investment over time and the end balance according to the inputs you specify. The compound interest calculator simulates how much you can grow your investment with the monthly contribution, your expected investment annual rate of return, and the years you expect to invest. You can adjust these parameters to simulate the growth over time.

##### How to read the chart above?

The yellow line represents your total contribution over the period. The blue line represents your total balance, which includes your contribution and interest. You can hover every year and see the total amount up to that year.

As you can see from the graph, the yellow line is linear, but the blue line growth is exponential. This growth illustrates the effect of compound interest on your investment. The longer your investment horizon, the more you see this compounding effect.

## What is compound interest?

Compound interest is the interest you earn on interest. The interest is calculated on the principal amount and the accumulated interest from previous periods. To enjoy this compound interest, you must reinvest the interest you earn back with your principal. As you reinvest the interest over a long period, your investment will grow faster and faster. This is the magic of compound interest that every investor should know. Compound interest works wonders with time. You can simulate this using our compound interest calculator above and use a longer time.

## Why is it important?

Over time, the effect of compound interest can be significant as the interest earned in each period grows exponentially. It is a powerful tool for investors looking to grow their savings or investments over a long period. However, it can also work against you if you borrow money, as the interest charges accumulate rapidly over time.

Compound interest can help investors accelerate their wealth building. They can grow their investment ‘passively’ without too much effort. The key here is to let your investment compound over a long period.

Knowing that time plays a vital role in compound interest, as investors, we should start investing as early as possible. The good news is that the initial investment can be small, and you can keep increasing your monthly contribution as you earn more as you grow your career. The longer your investment time horizon, the more you can benefit from this magic of compound interest.