Compound Interest Calculator

Simple interest is calculated only on the original principal amount throughout the investment period. Compound interest, on the other hand, is calculated on the principal plus all previously earned interest — meaning your interest earns interest. This creates exponential growth over time rather than linear growth. For example, ৳1,00,000 at 10% simple interest for 5 years gives ৳50,000 interest (total: ৳1,50,000). The same amount at 10% compound interest (yearly) for 5 years gives ৳61,051 interest (total: ৳1,61,051) — nearly ৳11,000 more, with the gap widening significantly over longer periods.

Compounding frequency refers to how often the earned interest is added back to the principal. The more frequent the compounding, the higher your effective return. At a nominal 8% annual rate: yearly compounding gives an effective annual rate (EAR) of exactly 8.00%; quarterly gives 8.243%; monthly gives 8.300%; daily gives 8.328%. While the differences appear small annually, they compound dramatically over decades. An investment of ৳5,00,000 at 8% for 20 years: yearly compounding gives ৳23,30,479; daily compounding gives ৳24,93,694 — a difference of over ৳1.6 lakh purely from compounding frequency.

The Rule of 72 is a simple mental shortcut to estimate how long it takes to double your investment: divide 72 by your annual interest rate. At 6% p.a., money doubles in 72 ÷ 6 = 12 years. At 9%, it doubles in 8 years. At 12%, in 6 years. The rule works best for interest rates between 4–15%. For higher rates, use the Rule of 69.3 for more precision. This rule is useful for quick sanity checks — if a bank promises to double your money in 3 years, that implies a return of around 24%, which should raise serious red flags.

The nominal interest rate is the stated annual rate without accounting for compounding within the year. The effective annual rate (EAR) is the actual return earned after accounting for compounding frequency. Formula: EAR = (1 + r/n)^n − 1, where r is the nominal rate and n is the number of compounding periods per year. For example, a bank advertising 8% p.a. compounded monthly has a nominal rate of 8% but an effective rate of (1 + 0.08/12)^12 − 1 = 8.30%. When comparing investment products, always compare effective annual rates, not nominal rates.

Inflation erodes the purchasing power of your returns. If your investment earns 8% p.a. but inflation is 6% p.a., your real return is approximately: (1.08/1.06) − 1 = 1.89% (not simply 8% − 6% = 2%). This is called the Fisher equation. For long-term wealth building, your investment must consistently beat inflation. In Bangladesh, official inflation has ranged between 5–10% in recent years. This means an FD earning 8% after TDS (effectively ~7.2% for TIN holders) may barely beat or even lag inflation during high-inflation periods — making equity or real asset investments relevant for long-term goals.

The standard compound interest formula is: A = P × (1 + r/n)^(n×t), where A is the final amount (maturity value), P is the principal (initial investment), r is the annual interest rate expressed as a decimal (e.g., 8% = 0.08), n is the number of times interest is compounded per year (daily=365, monthly=12, quarterly=4, half-yearly=2, yearly=1), and t is the time in years. Total interest earned = A − P. The effective annual rate = (1 + r/n)^n − 1. For inflation-adjusted (real) return: Real Value = A / (1 + i)^t, where i is the annual inflation rate.

Yes — compound interest is equally powerful when it works against you. Credit card debt, personal loans, and consumer financing often compound monthly or even daily. A credit card balance of ৳50,000 at 24% p.a. compounded monthly will grow to over ৳63,000 in just one year if unpaid. This is why paying off high-interest debt always gives a better guaranteed return than any investment. The rule of thumb: use compound interest to grow your savings, and pay off debt aggressively to avoid compound interest working against your wealth.