Compound Interest Calculator

Compound Interest Calculator Example

Embedded Example of this Compound Interest Calculator

Make Compounding Work For You

Taking advantage of compound interest need not be a passive strategy on your part. The bigger your investment base, the more that time and math will conspire to build up your wealth. That is why investment advisors suggest taking advantage of time and a schedule of periodic investing. The results build on themselves.

You can maximize the power of compounding by following a few easy strategies:

• Invest early. The longer your money has time to work for you, the better compounding works. In fact, the effect is far more dramatic the earlier you begin and the longer you stay invested. So, the sooner you can begin investing, the more interest or dividends, and hence growth of your principal, you will accumulate through compounding.
• Invest often. Adding to your investments on a regular basis such as monthly or weekly can build your wealth quickly. The accumulation builds the base on which your interest is calculated. To stay on a schedule for periodic investing, some people take part in automatic investment plans, in which money is taken out of their deposit accounts and put into their chosen investments.
• Reinvest your dividends. If you own shares in a stock or mutual fund, you may be able to reinvest your dividends into more shares. This continues to build your investment base, allowing you to compound your return. It's putting your new income to work for you.

Compounded Interest and Taxes

It will not do you a whole lot of good to compound the interest on your investments only to watch it get taken by the IRS. Fortunately, there are a few ways to compound your interest and avoid paying more tax than necessary.

Unless you invest in a tax-sheltered account, you will have to pay taxes on any investment interest at your regular income tax rate. Interest rates paid on savings/checking accounts and bonds, as well as dividends (shared profits), are all generally taxable. This could mean around 30-35 percent in both state and federal taxes. So a 10 percent rate of return could end up being closer to 6 percent after taxes.