What is compound interest?
Compound interest is interest earned not only on your original investment, but also on the interest that has already built up while the money stays invested. Simple interest, by contrast, is calculated only on the original principal. This page is the calculator and the explanation in one place: the formula, worked examples, how often interest compounds, and how compounding works in registered accounts and on debt. For portfolio projections with inflation adjustment, use the investment calculator; for a quick doubling-time estimate, the Rule of 72 calculator. All our calculators and beginner guides are listed on the investing basics hub.
As an example, imagine that you invest $1,000 for two years and each year it earns 10% with any proceeds being reinvested. In the first year you would earn $100, calculated as $1,000 × 10% = $100. This brings your total investment to $1,100. In the second year you would earn $110, more than the first year, because $1,100 × 10% = $110. Your total investment value is now $1,210. This compounding effect accelerates the longer you leave your money invested.
Compound interest formula
The formula used to calculate compound interest is:
A = P(1 + r/n)^(nt)
Where:
- A = the future value of the investment (ending value)
- P = the initial principal (starting value)
- r = the annual interest rate (as a decimal)
- n = the number of times interest is compounded per year
- t = the number of years
Worked example
If you invest $10,000 at 6% annual interest compounded monthly for 20 years:
- P = $10,000
- r = 0.06
- n = 12 (monthly compounding)
- t = 20
- A = $10,000 × (1 + 0.06/12)^(12 × 20) = $10,000 × (1.005)^240 = $33,102
Your $10,000 would grow to $33,102, earning $23,102 in interest, more than double your original investment. With simple interest, you would earn only $12,000 in interest ($10,000 × 6% × 20), ending at $22,000. That’s an $11,102 difference, entirely from compounding.
Compound interest growth table
The table below shows how a $10,000 investment grows at various annual returns over different time periods, assuming annual compounding with no additional contributions:
| Years | 4% Return | 6% Return | 8% Return | 10% Return |
|---|---|---|---|---|
| 5 | $12,167 | $13,382 | $14,693 | $16,105 |
| 10 | $14,802 | $17,908 | $21,589 | $25,937 |
| 15 | $18,009 | $23,966 | $31,722 | $41,772 |
| 20 | $21,911 | $32,071 | $46,610 | $67,275 |
| 25 | $26,658 | $42,919 | $68,485 | $108,347 |
| 30 | $32,434 | $57,435 | $100,627 | $174,494 |
| 35 | $39,461 | $76,861 | $147,853 | $281,024 |
| 40 | $48,010 | $102,857 | $217,245 | $452,593 |
Notice how at 10% annual return, your $10,000 turns into $452,593 over 40 years, entirely from compound growth. The longer you stay invested, the more dramatic the effect.
How long it takes to double
A quick way to estimate doubling time is the Rule of 72: divide 72 by the annual rate. At 6%, money doubles in about 12 years; at 8%, in about 9. The Rule of 72 calculator has the full reference table, the inflation version and how accurate the shortcut is.
How compounding frequency affects your returns
Interest can be compounded at different intervals: annually, semi-annually, quarterly, monthly, or daily. The more frequently interest is compounded, the more you earn, because each compounding period adds interest to a slightly larger balance.
| Compounding Frequency | $10,000 at 6% After 10 Years | Total Interest Earned |
|---|---|---|
| Annually (1/year) | $17,908 | $7,908 |
| Semi-annually (2/year) | $18,061 | $8,061 |
| Quarterly (4/year) | $18,140 | $8,140 |
| Monthly (12/year) | $18,194 | $8,194 |
| Daily (365/year) | $18,220 | $8,220 |
In Canada:
- Savings accounts and GICs compound daily, monthly, quarterly or yearly, or pay interest at maturity, depending on the product; check the account or GIC terms
- Fixed-rate mortgages are usually compounded semi-annually (the Interest Act requires a blended-payment mortgage to state its rate calculated yearly or half-yearly); some variable-rate mortgages, such as RBC’s, compound monthly
- Investments (stocks, ETFs, mutual funds) compound based on reinvested returns, which can occur at any frequency
While the difference between monthly and daily compounding is small for savings, choosing monthly compounding over annual compounding on a long-term GIC can earn you hundreds of extra dollars.
Compound interest vs. simple interest
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculated on | Principal only | Principal + accumulated interest |
| Growth pattern | Linear (same amount each year) | Exponential (accelerating) |
| Formula | I = P × r × t | A = P(1 + r/n)^(nt) |
| $10,000 at 6% for 20 years | $22,000 | $33,102 (monthly) |
| Best for | Short-term, simple calculations | Long-term investments |
| Canadian example | Some bonds, certain loans | Savings accounts, GICs, investments |
The gap starts small and widens every year. Here is $10,000 at 5% a year:
| Year | Simple interest | Compound interest (annual) |
|---|---|---|
| 1 | $10,500 | $10,500 |
| 2 | $11,000 | $11,025 |
| 3 | $11,500 | $11,576 |
| 10 | $15,000 | $16,289 |
| 20 | $20,000 | $26,533 |
| 30 | $25,000 | $43,219 |
Over one to three years the difference is modest; over decades it becomes large.
Does investing become easier after the first $100,000?
It is often said that the first $100,000 is the hardest to reach, with each subsequent $100,000 becoming easier. The reason is the impact that compounding has once you accumulate a significant balance.
Consider an investor contributing $500 at the end of each month at an 8% annual return, compounded monthly:
| Milestone | Time to Reach | Cumulative Years |
|---|---|---|
| $0 → $100,000 | ~10.6 years | 10.6 |
| $100K → $200K | ~5.7 years | 16.3 |
| $200K → $300K | ~3.9 years | 20.2 |
| $300K → $400K | ~3.0 years | 23.1 |
| $400K → $500K | ~2.4 years | 25.5 |
| $500K → $1M | ~7.8 years | 33.4 |
The first $100,000 takes about a decade, but going from $400K to $500K takes only about 2.4 years. Once the compounding engine has a large base to work with, the returns generated by your existing investments contribute more than your new contributions.
The impact of starting early
The earlier you start investing, the more time compound interest has to work. Even small amounts invested early can outperform larger amounts invested later.
Scenario comparison:
- Investor A starts at age 25, invests $300/month until age 65 (40 years)
- Investor B starts at age 35, invests $500/month until age 65 (30 years)
Both earn a 7% annual return, compounded monthly, with contributions at the end of each month:
| Investor A (age 25 start) | Investor B (age 35 start) | |
|---|---|---|
| Monthly contribution | $300 | $500 |
| Total contributed | $144,000 | $180,000 |
| Portfolio at 65 | $787,444 | $609,985 |
Investor A contributes $36,000 less but ends up with $177,459 more, because of 10 extra years of compounding. The age-specific versions of this comparison are in investing in your 20s, investing in your 30s and starting to invest at 50.
How the impact of inflation reduces compound growth
While compound interest grows your money, inflation erodes its purchasing power. If your investments earn 7% but inflation is 2.5%, your real return is approximately 4.5%.
| Nominal Return | Inflation Rate | Real Return | $10,000 After 25 Years (Real Value) |
|---|---|---|---|
| 5% | 2% | ~3% | $20,938 |
| 7% | 2% | ~5% | $33,864 |
| 7% | 3% | ~4% | $26,658 |
| 10% | 3% | ~7% | $54,274 |
A savings account paying less than the inflation rate loses purchasing power even as the balance grows. The investment calculator shows nominal and inflation-adjusted values side by side.
Compound interest on debt
Compounding works the same way on money you owe. Unpaid interest on a credit card or loan is added to the balance and then charges interest itself. A $5,000 balance at 20% a year, never paid down and compounding annually:
| Time | Balance owed |
|---|---|
| Start | $5,000 |
| 1 year | $6,000 |
| 5 years | $12,442 |
| 10 years | $30,959 |
This is why paying off high-interest debt usually comes before investing in the step-by-step plan for building wealth: few investments reliably earn more than a credit card charges.
How to use this compound interest calculator
This calculator shows how an investment grows over time with compound interest. You can:
- Enter an initial lump sum and an annual interest rate
- Add regular contributions, made monthly or annually at the end of each period
- Choose the number of years (up to 99) and the compounding frequency: daily, monthly, quarterly, semi-annually or annually
- Read the year-by-year table and chart of contributions, interest and balance, and use the share button to copy a link to your scenario
The results are in nominal dollars; to see the effect of inflation, use the investment calculator or the real-return table above.
How to maximize the impact of compound interest
To maximize the power of compound interest on your investments in Canada, tax-advantaged accounts can help prevent your returns from being eroded by annual taxes:
- TFSA: growth and withdrawals are generally tax-free.
- RRSP: contributions are deductible and growth is usually tax-deferred until withdrawal.
- FHSA: contributions are deductible and growth is tax-free when withdrawn for a qualifying first home.
Which account to fill first depends on your tax rate now and later; see TFSA vs RRSP for beginners.
In a taxable account, interest income is usually taxed each year at your marginal rate, which reduces the effective compounding. A 6% interest return in a taxable account at a 30% marginal rate is effectively about 4.2%, against the full 6% kept in a TFSA.
Even conservative investments like GICs benefit substantially from compound interest when held in registered accounts.
Putting it into practice
Compounding rewards time more than anything else, so the practical questions are where to hold the money and how much to add. Our guide for new investors covers the first account and fund; monthly investing targets covers the contribution; and dollar-cost averaging explains regular contributions against a lump sum. For a one-off sum, see how to invest $10,000.
Related calculators
- Investment Calculator: project portfolio growth with monthly contributions and inflation
- TFSA Calculator: See tax-free compounding in a TFSA
- RRSP Calculator: Model tax-deferred retirement growth
- Retirement Calculator: Plan how compound growth funds your retirement
- GIC Calculator: Calculate guaranteed interest returns
- Savings Goal Calculator: See how compounding helps you reach savings targets
- How to calculate ROI: total and annualized return on any investment
- MER Calculator: See how fees reduce compound growth over time