Compound Interest Calculator — Monthly Contributions & Inflation

Understanding Compound Interest

Compound interest is the interest you earn on interest. It's often called "interest on interest," and it makes your money grow faster because you earn returns not only on your initial principal but also on the accumulated interest from previous periods.

How Does Compound Interest Work?

Imagine you invest £100 with a 10% annual interest rate. After one year, you earn £10 in interest, bringing your total to £110. In the second year, you earn 10% interest on £110 (not just the original £100), meaning you earn £11, bringing your total to £121. This snowball effect is the power of compounding.

Key Components of the Calculator:

• Initial Deposit: The amount of money you start with.
• Monthly Contributions: Regular additional payments you make to your investment.
• Annual Interest Rate: The percentage return your investment earns each year.
• Time Period (Years): The duration over which your money will grow.
• Annual Inflation Rate: The percentage at which the cost of goods and services is rising each year, eroding purchasing power.
• Enable Inflation Adjustment: Toggling this on will use the specified annual inflation rate to show you the "real" purchasing power of your future money, giving a more realistic view of your returns after accounting for rising prices.

Nominal vs Effective Interest Rate (APR vs EAR/APY)

Banks in the UK often quote a Nominal APR (with a compounding frequency, e.g. monthly), while savings products commonly highlight the Effective Annual Rate (EAR, also called APY), which includes the effect of intra-year compounding. For planning monthly contributions, it’s best to convert everything to a true effective monthly rate.

Formulas at a Glance

• EAR from Nominal APR (m compounds/year):
  EAR = (1 + r_nom / m)^m − 1
• Nominal APR from EAR:
  r_nom = m · ( (1 + EAR)^(1/m) − 1 )
• Monthly effective rate from EAR:
  r_monthly = (1 + EAR)^(1/12) − 1
• Inflation adjustment (Fisher relation):
  Real EAR = (1 + EAR_nominal)/(1 + inflation) − 1

Quick Examples

• 12% nominal APR, compounded monthly (m=12):
  EAR = (1 + 0.12/12)^12 − 1 ≈ 12.6825%
Monthly effective ≈ (1 + 0.126825)^(1/12) − 1 ≈ 1.0000%
• 5% EAR (APY):
  Monthly effective ≈ (1 + 0.05)^(1/12) − 1 ≈ 0.4074%
• Real return with 7% EAR and 3% inflation:
  Real EAR = 1.07/1.03 − 1 ≈ 3.8835%

Why is Compound Interest Important?

• Wealth Accumulation: It's a fundamental principle for long-term wealth building, especially for retirement savings and significant financial goals.
• FIRE Movement: Central to the Financial Independence, Retire Early (FIRE) movement, as it allows investments to grow exponentially over time.
• Time is Your Ally: The longer your money compounds, the more significant the returns. Starting early gives your investments more time to grow.

How This Tool Works

This Compound Interest Calculator operates entirely client-side within your browser. No data is sent to a server, ensuring your privacy. It uses JavaScript to perform the calculations based on the inputs you provide, offering immediate results. The calculator supports both EAR/APY and Nominal APR with compounding frequency, converts them to a consistent monthly effective rate, and can optionally display inflation-adjusted (real) results in GBP.

FAQ

What is the compound interest formula?

A common periodic form is A = P(1 + r/n)^(n·t) + C · [((1 + r/n)^(n·t) − 1) / (r/n)].

How do monthly contributions affect growth?

They add an annuity component, greatly boosting the future value versus a one-time deposit.

How does inflation adjustment work?

It applies the Fisher relation to show real (purchasing-power) results.

Is my data private?

Yes—everything runs locally in your browser.