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Updated on Thursday, March 4, 2021
Compound interest is how deposit accounts grow your money. Some accounts grow your money faster and more efficiently than others, which is why finding out how your account compounds interest is crucial to your savings. Use our compound interest calculator to see how much you could save with an account and to help inform your decision in choosing the right account for you.
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How to use our compound interest calculators
Our compound interest calculator is designed to help you predict the return on your investment or savings accounts, taking into account the impact of compounding interest over time.
Compound interest investment calculator
To use our compound interest investment calculator, you will need to input the following information:
Initial investment: This is the amount of money you start with in your investment account, whether it’s your opening deposit if you’re just opening an account or the balance in an existing account that you want to calculate for.
Years to grow: This is how long you expect to leave your money in the account to grow.
Rate of return: It is more difficult to determine the exact rate of return on an investment account than, say, a savings account. The S&P 500’s average annual return from 2010 to 2019 was around 14%, for example, but there is no specific rate to refer to on an individual investment account.
Additional contributions: This is how much you expect to contribute to your investment account in addition to your original balance.
Frequency of contributions: This indicates how often you expect to make those additional contributions.
Compound interval: This is how often interest compounds in your account. You can find this information in your account’s terms and conditions documents, or by calling the account issuer.
- Daily: Daily compounding is when today’s balance earns interest, and that new balance earns more interest tomorrow, and so on. Daily compounding may also be labeled as continuous compounding.
- Monthly: Monthly compounding takes interest earned into consideration each month.
- Yearly: The slowest interval, yearly compounding grows your money once a year.
Compound interest savings calculator
With the compound interest savings calculator, you’ll need to provide the following inputs:
Initial balance: The amount of money in your account at the outset, either an initial deposit on opening a new account or a balance in an existing account.
Years to save: This is the length of time you expect to let the money in your account grow. Note that we measure this period in years, so you must envision holding your account for at least one year for this calculator.
Rate of return: For savings accounts, this number is the APY, or annual percentage yield, listed for the account.
Additional contributions: The heart of saving and investing is making regular contributions to grow your balance. This figure is the amount you plan to add to your account in addition to your initial balance.
Frequency of contributions: This is how often you expect to make those additional contributions.
Compound interval: This field accounts for how often interest compounds in your savings account. If you’re unsure, check your account’s terms and conditions documents or call the account issuer.
- Daily: Also known as continuous compounding, this method rolls over your balance and new interest earned every day for continuous growth.
- Monthly: Monthly compounding grows your balance according to earned interest on a monthly basis.
- Yearly: Yearly compounding is the least favorable, as your money sits in the account for a year before it gets to really benefit from earned interest.
Compound interest formula
If you’re curious about the more nitty gritty calculations in the compound interest formula, here’s how to calculate compound interest yourself.
A = P(1 + r/n)nt
A = Your final balance, the number we’re here to calculate
P = Principal amount, your starting balance
r = Annual nominal interest rate, the APY
n = Number of compounding periods per year
t = Number of years
Compound interest FAQ
Now that you’ve seen for yourself how compound interest can boost your savings over time, here’s more information on what compound interest is and how it works.
Simply put, compound interest is when your interest, not just your principal amount, earns interest.
Interest can compound at a few different frequencies:
- Daily (or continuous) compounding
- Monthly compounding
- Quarterly compounding
- Semiannual compounding
- Annual compounding
The frequency of compounding determines how efficiently your money grows. With daily compounding, the interest your balance earns today is added to your balance immediately, which means you earn more interest tomorrow, and so forth, day after day. With annual compounding, the interest you earn is not added to the balance until a whole year has gone by.
Daily compounding is the best form of compounding as it grows your money the most efficiently by growing every single day. Monthly compounding isn’t perfect, but it still grows your money faster than yearly compounding. For example, keeping a $5,000 deposit in a daily compounding savings account at 3% will earn $152 and some change in interest in a year. Annual compounding, on the other hand, loses you $2, earning $150 instead. This may not seem like a lot, but the bigger your balance and the longer you leave your money, that savings can really add up.
Simple interest is the return you get on a sum of money invested over a given time period. Compound interest is the return you get on a sum of money, plus the reinvested interest over a given time period. It’s like the interest you get on your interest.
When calculating simple interest, it’s as easy as multiplying your principal balance by the given interest rate to find how much you’ll earn in a year.
For example, if you have $5,000 in an account that has a 3% interest rate, the balance will earn $150 in one year. In three years, the balance will earn $450. This is assuming you don’t make any additional deposits.
|Year 1||$5,000 x 3% = $150|
|Year 2||$5,000 x 3% = $150|
|Year 3||$5,000 x 3% = $150|
|Total||$5,000 + $450 = $5,450|
With compound interest, you take the same starting amount of $5,000, the 3% interest rate and no additional deposits. In this example, the account compounds annually. That means every year, the interest you earn is added to the balance, which then earns more interest.
You’ll notice that Year 2 starts with more money thanks to the interest you earned in Year 1. The same happens with Year 3, resulting in a bigger payout by the end.
|Year 1||$5,000 x 3% = $150|
|Year 2||$5,150 x 3% = $154.50|
|Year 3||$5,304.50 x 3% = $159.14|
|Total||$5,000 + $463.64 = $5,463.64|
The more often interest is compounded in your account, the more money you’ll earn. If the example account above had monthly, rather than annual compounding, you’d be earning slightly more interest over the three-year period.
Compound interest grows your money faster and more efficiently. You end up with more money in the end than with simple interest. Nowadays, many of the top online savings accounts compound interest daily. This is the best outcome for your money, since your balance is constantly growing.