What Is Compound Interest?
Compound interest is interest calculated on both your original principal and the interest you have already earned. Unlike simple interest — which only ever applies to your starting amount — compound interest lets your money grow exponentially over time. It is often described as "interest on interest" and is the fundamental principle behind long-term wealth building.
With simple interest on $10,000 at 7% annually, you earn $700 every year, flat. With compound interest, your first year earns $700 — but the second year you earn 7% on $10,700, so you earn $749. By year 20, you are earning over $2,400 annually on that same original $10,000, without adding another cent.
The Formula
The standard formula is: A = P × (1 + r/n)nt — where A is the final amount, P is the principal, r is the annual rate, n is compounding periods per year, and t is years. When you add regular contributions, the calculation becomes more complex. Our calculator handles this automatically.
Worked Examples
Example 1 — Starting a Share Portfolio at 30
Priya invests $15,000 into an index fund returning 8% p.a., contributing $300/month for 35 years until age 65.
| Item | Amount |
|---|---|
| Starting amount | $15,000 |
| Monthly contributions × 35 years | $126,000 |
| Total money invested | $141,000 |
| Final balance | ~$672,000 |
| Interest earned | ~$531,000 |
The interest earned is nearly four times what Priya personally contributed — that is 35 years of compounding at work.
Example 2 — High-Interest Savings Account
Marcus puts $5,000 in a savings account at 4.8% p.a. compounding monthly. No extra contributions. After 10 years:
| Item | Amount |
|---|---|
| Starting balance | $5,000 |
| Interest earned (10 years) | $3,047 |
| Final balance | $8,047 |
A 61% gain in 10 years with zero extra contributions.
Compounding Frequency: Does It Matter?
| Frequency | Final Balance ($10k, 7%, 20yrs) | vs Annual |
|---|---|---|
| Annually | $38,697 | — |
| Quarterly | $39,716 | +$1,019 |
| Monthly | $40,063 | +$1,366 |
| Daily | $40,139 | +$1,442 |
The gap between annual and daily compounding is about $1,400 over 20 years — real, but not dramatic. What matters far more is your rate and how long you stay invested. Most Australian savings accounts compound daily and credit monthly.
Starting Early vs Starting Late
| Investor | Starts | Years | Balance at 65 ($300/mth, 7%) |
|---|---|---|---|
| Sophie | Age 22 | 43 yrs | ~$1,060,000 |
| Jake | Age 42 | 23 yrs | ~$218,000 |
Same monthly amount — but Sophie ends up with nearly 5× more. Those extra 20 years are not additive; they are multiplicative. Start early, even with small amounts.
The Rule of 72
Divide 72 by your annual interest rate to estimate how long it takes to double your money. At 7%, your money doubles in roughly 10.3 years. At 9%, it is 8 years. A handy sanity check when comparing investment options.
Compound Interest and Superannuation
Australians have a built-in compound interest machine in their superannuation. The compulsory 11.5% Super Guarantee means your employer automatically contributes to a long-term compounding investment every pay cycle. Super returns — typically 7–9% over long periods in a balanced fund — combined with decades of compounding explain why even average earners retire with substantial balances. Check our Superannuation Calculator for a personalised projection.
Inflation and Real Returns
Our calculator's inflation adjustment shows your result in today's purchasing power. A balance of $600,000 in 30 years sounds impressive — but if inflation averaged 3%, the real value is closer to $247,000 in today's dollars. Always plan using real returns (nominal rate minus inflation) for long-term goals.
Frequently Asked Questions
Disclaimer: This calculator is for general informational purposes only. Interest rates and investment returns are not guaranteed. Past performance is not an indicator of future performance. Always seek advice from a licensed financial adviser before making investment decisions.
Related Finance Tools
- Superannuation Calculator Australia — Project your super balance at retirement
- Mortgage Calculator Australia — See how compounding works against you on a home loan
- Income Tax Calculator — Calculate your marginal rate (affects tax on interest earned)
- Investment Property Calculator — Rental yield and cash flow analysis