Compound Interest Calculator
The calculator and graph above are for illustration purpose of potential growth over time and does not take into account that investments typically experience both good and bad periods. They do not constitute financial or investment advice. Annual returns are influenced by factors such as the market and the composition of the portfolio. Savings are affected by inflation, taxation, exchange rates, and fees, which are not included in the calculation example. Financial instruments can both rise and fall in value, and there is a risk of capital loss. Financial instruments such as funds and ETFs have costs that affect returns—see costs for each investment on the platform before investing. On our platform, you can also view historical data for securities and indices, but past performance is not a guarantee of future ones.
Unlike simple interest, which calculates returns only on the original principal, compound interest reinvests earnings, allowing investments to accelerate their growth. However, while compounding can work in your favour as an investor, it can also work against you when it comes to debt, causing balances to swell if left unchecked. So its important to learn as much as you can about this concept so you can stay on track to reaching your financial goals.
What is compound interest?
Compound interest refers to the process of earning interest on both the original amount of money invested (the principal) and any accumulated interest from previous periods. Unlike simple interest, which only calculates returns on the principal, compound interest allows your money to grow faster over time by reinvesting earnings.
Let’s break this down with a comparison example:
- Simple interest. You invest SGD 1,000 at an annual interest rate of 5% over five years. With simple interest, you would earn SGD 50 each year, resulting in a total of SGD 1,250 by the end of five years.
- Compound Interest. You invest the same SGD 1,000 at a 5% annual rate, compounded annually. After the first year, your balance grows to SGD 1,050. In the second year, the 5% interest is calculated at SGD 1,050, earning you SGD 52.50. Over five years, your total grows to SGD 1,276.28.
This reinvestment of earnings accelerates growth, making compound interest a critical tool for building wealth.
The compound interest formula
The formula for calculating compound interest is:
A=P(1+r/n)ᶺnt
- A = the total amount after interest
- P = the principal amount (initial investment)
- r = the annual interest rate (as a decimal)
- n = the number of times interest is compounded per year
- t = the number of years the money is invested or borrowed
For example, if you invest SGD 5,000 at a 5% annual rate compounded monthly for 10 years:
A=5,000(1+0.05/12)ᶺ(12×10)=5,000(1.00417)ᶺ120≈8,235.05
Your investment grows to approximately SGD 8,235, with SGD 3,235 earned in interest.
Compound interest can work wonders for your savings and investments but can also increase debt if left unchecked.
How does compound interest work?
Compound interest works by leveraging time, frequency, and rate of return to accelerate the growth of an investment or savings. Its effectiveness depends on how often interest is compounded and how long the investment is allowed to grow.
Key factors influencing compound interest:
- Time. The longer your money remains invested, the more pronounced the compounding effect. A small initial investment can grow significantly over decades, making time the most crucial component.
- Compounding frequency. Interest can be compounded annually, semi-annually, quarterly, monthly, or daily. The more frequently interest is compounded, the faster your money grows.
For example:- A SGD 10,000 investment at 5% annual interest over 10 years grows to SGD 16,288.95 with annual compounding.
- With monthly compounding, the same investment grows to SGD 16,470.09—an extra SGD 181.14.
- Rate of return. Higher interest rates amplify the power of compounding. Even a slight increase in the rate of return can result in a significantly larger balance over time.
The power of compound interest
Compound interest grows your money exponentially over time. The chart below illustrates how a SGD 1,000 investment grows over 30 years under different annual interest rates.
| Year | 5% interest | 7% interest | 10% interest |
| 0 | SGD 1,000 | SGD 1,000 | SGD 1,000 |
| 10 | SGD 1,629 | SGD 1,967 | SGD 2,594 |
| 20 | SGD 2,653 | SGD 3,870 | SGD 6,727 |
| 30 | SGD 4,322 | SGD 7,612 | SGD 17,449 |
Additionally, how often your money earns interest affects its growth, too. Here's an example of SGD 1,000 invested at a 5% annual rate over 30 years:
| Compounding frequency | Balance after 30 years |
| Annually | SGD 4,321.94 |
| Quarterly | SGD 4,450.00 |
| Monthly | SGD 4,481.23 |
The role of reinvestment and time
The power of compound interest lies not only in its ability to grow your wealth but also in the critical roles of reinvestment and time. Reinvesting earnings ensures each compounding period starts with a larger base, accelerating growth exponentially.
For example, without reinvesting, interest only accumulates on the initial principal, significantly reducing potential gains.
Time, however, is the most powerful driver of compound interest. Starting early enhances the effect of compounding dramatically.
Consider this scenario:
A 25-year-old investing SGD 200 monthly at a 7% annual return accumulates nearly SGD 500,000 by age 65. A 35-year-old investing the same amount reaches only around SGD 250,000 by age 65.
This demonstrates how even a 10-year delay in starting can halve the potential outcome, underscoring the importance of acting early and reinvesting consistently.
Advantages of compound interest
Compound interest provides benefits to the holders of debt instruments or receivers of compounded payments, making it a powerful tool for growth. Here are some of its main advantages:
Accelerates the growth of investments
Compounding grows wealth exponentially by reinvesting earnings. Over time, the reinvested returns generate their own gains, making the overall investment grow faster. Similarly to previous examples, a SGD 10,000 investment at 6% annual interest compounded monthly grows to SGD 18,194 after 10 years.
Preserves purchasing power against inflation
Investments with compounding returns help protect against inflation, which erodes the value of money over time. By delivering returns that exceed inflation rates, compounding ensures that your savings retain their purchasing power and continue to grow in real terms.
Supports flexible financial goals
Compounding is versatile and supports various objectives like retirement savings, education funds, or wealth-building. Accounts like ISAs or SIPPs broaden its benefits with tax efficiency, making it suitable for diverse financial goals.
Maximises returns through automated reinvestment
Automated tools like Dividend Reinvestment Plans (DRIPs) make it easier to reinvest earnings consistently. By automatically adding dividends to the principal, these plans increase compounding returns without requiring manual effort.
Rewards early and consistent investors
Starting early and contributing regularly dramatically boosts long-term returns. For instance, monthly contributions of SGD 300 at a 5% annual return can grow to over SGD 250,000 in 30 years. This shows how consistent investments, combined with time, can generate substantial wealth.
Examples of compound interest in real-life
Compound interest impacts everyday financial activities, from growing savings to managing debt.
Savings accounts and certificates of deposit (CDs)
Savings accounts and CDs show how compound interest steadily grows wealth. Banks typically compound interest daily or monthly, enabling even small balances to grow significantly over time.
For example, a SGD 10,000 deposit in a CD with a 4% annual interest rate compounded quarterly reaches SGD 12,682 after six years. Frequent compounding ensures faster growth compared to annual or semi-annual compounding schedules.
Mutual funds, ETFs, and DRIPs
Mutual funds and ETFs often feature compound interest with reinvested dividends and interest payments. Dividend Reinvestment Plans (DRIPs) automatically reinvest earnings, compounding returns without additional manual effort.
For instance, a SGD 10,000 investment in an ETF with a 6% annual return and reinvested dividends can grow to SGD 57,435 over 30 years. These options provide a hands-free way to compound wealth over the long term.
Retirement accounts
European retirement accounts, such as ISAs, SIPPs, or company-sponsored pension schemes, maximize compound interest over the long term. Contributions, combined with tax benefits and reinvested earnings, help balances grow exponentially over time.
For example, contributing SGD 300 monthly to a pension account with a 6% annual return over 35 years can lead to a balance exceeding SGD 400,000. Accounts like SIPPs or ISAs offer additional flexibility, allowing you to choose and manage investments aligned with your goals.
Debt: Credit cards and loans
Compound interest doesn't only grow wealth—it also increases debt balances if left unchecked. Credit cards and certain loans apply compounding to unpaid balances, making them expensive over time.
For example, a SGD 5,000 credit card balance with a 20% annual interest rate compounded daily increases to more than SGD 6,100 within a year if no payments are made. Similarly, a SGD 30,000 student loan with 5% annual interest compounded monthly grows to SGD 38,501 after five years of deferment.
Tools for calculating compound interest
Calculating compound interest accurately requires reliable tools. Whether planning your savings, investments, or debt repayments, these tools simplify complex calculations, enabling more precise financial planning.
Excel spreadsheets
Microsoft Excel provides flexible options for calculating compound interest. The FV (Future Value) function is a common choice:
- Formula =FV(rate, nper, pmt, [pv], [type])
- rate: Interest rate per compounding period.
- nper: Total number of periods.
- pmt: Recurring contributions or withdrawals.
- pv: Present value (principal amount).
- type: Timing of contributions (0 = end of period, 1 = start of period).
Example calculation in Excel:
A SGD 10,000 investment with a 5% annual interest rate compounded monthly for 20 years results in approximately SGD 33,066. This is calculated as: =FV(0.05/12, 20*12, 0, -10000, 0)
Monthly compound interest calculators
For those contributing monthly to an investment, specialised tools are helpful. These calculators incorporate:
- Regular contributions (e.g., SGD 200/month).
- Interest rates.
- Compounding frequencies.
Example:
Investing SGD 200 monthly at an 8% annual rate compounded monthly for 30 years results in a total balance of approximately SGD 298,191.
Advanced financial tools
Some platforms offer advanced financial modeling tools for investors. These include:
- Retirement-focused calculators. Project balances for tax-advantaged accounts like SIPPs or ISAs.
- Inflation-adjusted calculators. Account for purchasing power over time to provide more realistic projections.
Challenges and misconceptions about compounding
Compound interest is a powerful financial tool, but it comes with challenges and misconceptions that investors need to understand.
Compounding requires time to deliver results
One of the most common misconceptions is expecting immediate results. Compound interest thrives on patience as the exponential growth becomes more pronounced over longer periods. Those starting late might find the returns underwhelming compared to early investors, underscoring the importance of a long-term approach.
Inflation, taxes, and fees can reduce gains
While compounding can grow wealth, external factors like inflation, taxes, and fees diminish returns. High inflation reduces purchasing power, while taxes on gains can slow compounding's impact. Investment fees further reduce the principal amount, decreasing the base for future growth. Choosing tax-efficient accounts and low-cost investments helps mitigate these effects.
Compounding isn't automatic for all investment products
Not every financial product compounds earnings automatically. Savings accounts, DRIPs, and certain retirement plans facilitate compounding, but others may require manual reinvestment. Failing to reinvest earnings can reduce the growth potential, so it's crucial to understand the product's mechanics and set up reinvestment options where applicable.
Misinterpreting compounding terms
Confusion about compounding frequency and rates often leads to unrealistic expectations. For instance, daily compounding produces slightly higher returns than annual compounding, but the difference isn't dramatic in the short term. Using tools like compound interest calculators clarifies how frequency and rate interact to influence growth.
Understanding risk in compounded investments
Compounding increases both gains and losses, depending on the investment type. High-risk investments with the potential for significant returns also expose you to greater volatility. Balancing a portfolio with diversified assets ensures stability while maximising the benefits of compounding.
Conclusion: Start early and stay consistent
Compound interest can potentially help your wealth grow faster by earning returns on both your initial investment and the gains made over time. Starting early gives your investments more time to grow, while consistent contributions can further boost returns. But it’s never too late. Starting now is better than never starting.
So, take advantage of the compounding benefits by starting as soon as possible, remaining patient, and focusing on your long-term financial goals. Small steps today could lead to substantial growth in the future.
Learn More
How to maximise your compounding returns: A comprehensive guide
The content provided on or via the website is made available solely for educational purposes. It is not intended to be, and should not be construed as, professional financial advice. Users are encouraged to seek independent advice from a qualified professional before making any financial decisions. The Saxo Bank Group entities do not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.
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