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Money guide

How compound interest works

A simple guide to compound interest, its formulas, and the difference between bank rates and share-market returns.

By
Clova team
Published
Reviewed

Compound interest is where you earn a return on both your starting amount and on the interest you have earn from earlier returns. This is why starting early matters: more time gives your money more chances to compound.

Projected balance

Hover, touch and drag, or use your keyboard to inspect both balances.

Regular contributions · $292,465No contributions · $38,697
$

The amount invested at the start.

$

The amount added at the end of each contribution period.

%

An effective annual return for this illustration.

The length of time the money remains invested.

How compound interest works

When money in a savings account, super fund or investment earns a return, that return is added to the balance. The next return is worked out from the new, larger balance. Simple interest is different because it is only calculated from the starting amount.

Using the current settings in the chart:

  • After 5 years, the balance with regular contributions is $49,623, compared with $14,026 from the starting amount alone.
  • After 10 years, those balances are $105,197 and $19,672.

Change the starting amount, contribution or return and these amounts update with the chart. The curve gets steeper because every new period starts with a larger balance.

The compound interest formula

With no contributions or fees,the base formula is:

A=P(1+i)tA = P(1 + i)^t
  • PP is the starting balance.
  • ii is the effective annual return as a decimal.
  • tt is the number of years.
  • AA is the ending balance.

For example, $10,000 growing at an effective rate of 5% for 10 years becomes $16,288.95:

10,000(1.05)10=16,288.9510{,}000(1.05)^{10} = 16{,}288.95

For asking how often interest is compounded, use this formula:

A=P(1+rn)ntA = P\left(1 + \frac{r}{n}\right)^{nt}

Here, rr is the nominal annual rate and nn is the number of compounding periods each year. For monthly compounding, n=12n = 12.

Adding regular contributions

If CC is added at the end of each period, the calculator uses:

A=P(1+j)N+C(1+j)N−1jA = P(1 + j)^N + C\frac{(1 + j)^N - 1}{j}

Here, jj is the return for each contribution period and NN is the total number of periods. The full calculator shows how this formula changes when you turn on fees or inflation.

What is an average interest rate?

The average interest rate depends on what you have invested in. For example the S&P 500 returned about 10.0% a year annualised in US dollars when dividends were reinvested. After US inflation, the same history works out to about 6.8% a year.

Why might a bank offer around 5%?

A bank savings rate and a share-market return are different things. A savings rate is offered by a bank and changes over time. A share-market return comes from changing prices and dividends and is not guaranteed.

In June 2026, the Reserve Bank of Australia listed 4.80% for major-bank bonus savings accounts and 5.05% for one-year term deposits. The same table listed 3.10% for online savings accounts. A rate near 5% may therefore be a bonus, introductory or term-deposit rate with conditions—not the rate every savings account pays.

Use the rate for the thing you are modelling, and remember that a calculator shows what would happen if its assumptions stayed the same.

Try the formula yourself

Open the full calculator to see the formula update when you change contribution frequency or turn on fees and inflation.

Open full calculator

Current example: $292,465 after 20 years.

Common questions

Sources