- 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 future savings, investment returns, or loan interest costs.
Compound interest is one of the most powerful financial tools—it can significantly boost your savings when investing, but it can also increase your debt if not managed wisely. Whether you’re saving for retirement with KiwiSaver, 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 means earning interest on interest—not just on your original deposit (principal), but also on any accumulated interest. This creates exponential growth over time.
How Compound Interest Works
You deposit $1,000 into a savings account with a 5% annual interest rate, 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 keeps accumulating.
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 (as a decimal)
- n = Number of times interest is compounded per year
- t = Number of years
Investment Growth Over Time
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.
Use our Compound Interest Calculator to instantly see how different interest rates and time periods affect your savings.
Why Does Compound Interest Matter?
The earlier you start saving or investing, the more time your money has to grow.
The Power of Starting Early
- James starts investing at 25, contributing $200 per month for 30 years. By 55, he has $293,219.
- Emma starts investing at 35, contributing $300 per month for 20 years. By 55, she has $176,125.
Even though Emma contributed more per month, James ends up with more money because he started 10 years earlier.
Time is the key to maximising compound interest!
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 |
If you’re borrowing money, simple interest is better because you only pay interest on the original loan amount (common in car loans and personal loans).
If you’re saving or investing, compound interest is better because your money grows much faster 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 |
Comparing Compounding Frequencies
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:
- Growing savings – The earlier you save, the more your wealth grows.
- Building retirement funds – KiwiSaver accounts benefit massively from compounding over decades.
- Maximising investments – Shares, property, and bonds use reinvestment to build long-term wealth.
Long-Term Investment Growth
If you start investing $200 per month at 8% return from age 25, 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.
Credit Card Debt Trap
You have a $5,000 credit card balance with a 20% interest rate, compounded monthly.
If you only pay the minimum, you could end up paying thousands in extra interest over time.
Tip: Always pay more than the minimum on loans and credit cards to reduce interest costs.
How to Create a Compound Interest Calculator in Excel?
Want to track your savings and investments in Excel? Follow these steps:
Step 1: Set Up Your Excel Sheet
Open Excel and label your columns:
| A | B |
|---|---|
| Principal Amount ($) | 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)^(B3B4)**
Where:
- 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)^(B3A7)**
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!
