How compound interest works
1. What is compound interest?
Compound interest means the interest you earn is added to your balance and starts earning interest itself. Over long periods (10 to 20 years or more), this "interest on interest" makes savings grow exponentially rather than in a straight line.
2. Formula
A = P × (1 + r/n)n·t + PMT × [((1 + r/n)n·t − 1) ÷ (r/n)] × (1 + r/n)
- A: final balance; P: initial deposit; PMT: contribution per period.
- r: annual rate as a decimal; n: compounding periods per year (12 for monthly); t: years.
- The final factor (1 + r/n) applies because contributions are made at the start of each month.
3. Worked example
You start with 50,000,000 ₫ and add 3,000,000 ₫ at the start of every month at 8% per year, compounded monthly, for 10 years.
- Total contributed: 50M + 3M × 120 months = 410,000,000 ₫.
- Interest earned: 253,479,038 ₫.
- Final balance: 663,479,038 ₫, so interest adds about 62% on top of what you put in.
Frequently asked questions
Is monthly compounding better than yearly compounding?
Yes. The more often interest is compounded, the sooner it starts earning interest itself. At the same nominal rate, monthly compounding always ends with a slightly higher balance than yearly compounding.
What rate should I use for planning?
Vietnamese bank term deposits currently pay roughly 5% to 7% per year. Long-term balanced funds or stock investments are often modelled at 8% to 12% per year, with much higher risk and no guarantee.
When are monthly contributions added?
This calculator adds each contribution at the start of the month, so it earns interest for that month. Interest is compounded monthly.