Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any accumulated interest. This means with compound interest, you earn "interest on interest," leading to exponential growth over time. For example, $1,000 at 5% simple interest would earn $50 each year ($1,000 × 5%), while compounded annually it would earn $50 in year 1, $52.50 in year 2 ($1,050 × 5%), $55.13 in year 3, and so on.

The more frequently interest compounds, the greater your returns will be, though the difference becomes less significant at higher frequencies. Daily compounding will yield slightly more than monthly, which yields more than annually. However, the difference between daily and continuous compounding is minimal. What matters more is finding accounts with higher interest rates rather than focusing solely on compounding frequency once it's at least monthly.

Historical averages can guide expectations: savings accounts typically offer 0.5-2%, bonds 3-5%, and stocks 7-10% annually over long periods. However, past performance doesn't guarantee future results. For retirement planning, many financial advisors use 6-7% for balanced portfolios to account for inflation. Higher-risk investments may offer higher potential returns but with greater volatility and risk of loss.

Inflation reduces the purchasing power of your money over time. If your investments earn 6% annually but inflation is 2%, your "real" return is about 4%. Our calculator shows nominal returns. To see inflation-adjusted results, subtract the expected inflation rate from your interest rate input. For long-term planning, it's important to invest in assets that typically outpace inflation, like stocks or real estate, rather than just keeping money in savings accounts.

This depends on interest rates and personal circumstances. Generally, if your debt's interest rate is higher than your expected investment returns, prioritize paying off debt first. For example, credit card debt at 18% APR should take precedence over investing for 7% returns. For low-interest debt like some student loans or mortgages, investing while making regular payments might make sense. Also consider tax implications and your risk tolerance when making this decision.

Starting early is incredibly powerful due to compounding. Someone who invests $5,000 annually from age 25-35 (10 years) and then stops would have more at retirement than someone who invests $5,000 annually from 35-65 (30 years), assuming the same return. The early starter's money has more time to grow. Even small amounts invested early can grow substantially. The best time to start investing was yesterday; the second best time is today.

Tax-advantaged retirement accounts like 401(k)s and IRAs are excellent because they allow your money to grow tax-deferred or tax-free. Roth accounts are particularly powerful as qualified withdrawals are tax-free. For non-retirement goals, taxable brokerage accounts still benefit from compounding. The key is choosing accounts that align with your goals and time horizon while minimizing taxes and fees that can erode compounding benefits.

Market ups and downs are normal, but over long periods, the general upward trend allows compounding to work. Volatility can actually benefit regular investors through dollar-cost averaging—buying more shares when prices are low and fewer when high. The key is staying invested through downturns. Missing just a few of the best market days can significantly reduce returns. Time in the market generally matters more than timing the market.

Yes, you can model debt repayment by entering your debt amount as a negative initial investment and the interest rate you're paying. This shows how interest compounds against you. To see payoff scenarios, enter regular "annual additions" as your planned payments. The calculator will show how extra payments can save you interest and shorten the repayment period. This works for credit cards, loans, and mortgages.

The calculator provides mathematical projections based on constant returns, which rarely happen in reality. Market returns vary year-to-year, and actual results will differ. The projections are most useful for understanding the power of compounding and comparing different savings strategies rather than predicting exact future balances. For more precise planning, consider consulting a financial advisor who can account for taxes, fees, and your specific situation.