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- Compound interest is commonly described as "interest earned on interest."
- Compound interest can work to your advantage as your investments grow over time, but against you if you're paying off debt, like credit cards.
- A calculator can help predict how much money compound interest will earn over time.
Most people only think of interest in terms of how high or low a rate is. But understanding how interest is calculated — or how it compounds — is important, too. Using our compound interest calculator can help you understand how compound interest factors into your investments, savings, and debts.
Knowing how compound interest works can help you avoid expensive mistakes and make the most of your money, whether you're planning to save money, invest, borrow, or spend.
Using a compound interest calculator
Use our compound interest calculator to see how your initial investment will grow over time. We also let you change your compounding frequency, so if you need a daily compound interest calculator, a monthly compound interest calculator, or a compound annual interest rate calculator, we have you covered.
Compound Interest Calculator
Step-by-step guide to calculating compound interest
When using our compound interest calculator, you'll want to use the key components we talked about earlier: principal amount, interest rate, compounding frequency, time period, and, optionally, any regular contributions you're making. Just enter that information into the calculator, and it will give you how much money you'll have at the end of the given time period.
You can also press the "show details" button to see the breakdown of how much money you started with, how much extra money you contributed over time, and the total interest you earned.
If you're interested in compound interest savings, or how much money you're saving by using savings or investment accounts that offer compound interest, we can help you. As such, you can also use our calculator if you're interested in using an investment growth calculator, a future value calculator, a retirement savings calculator, or a wealth accumulation calculator.
If you're looking for a loan interest calculator to see how much interest you'll accrue while you're paying your loan off, our calculator can also help with that.
Our calculator uses the following compound interest formula to figure out how much you'll be left with at the end of the period:
As an example of how this works, let's say you decide to deposit your $10,000 annual bonus into a 5-year certificate of deposit (CD). You leave that money in the CD for the full five years, and it earns a 4% annual rate of interest that's compounded daily. The numbers you'd plug into each variable are as follows:
- P = $10,000
- r = 0.04
- n = 365
- t = 5
The formula gives you $12,213.89 for A. That's the total amount of money you'd have in your CD at the end of five years. This means you earned $2,213.89 in interest.
Tips for maximizing returns using interest
The best way to take advantage of compound interest is through saving and investing. If you're borrowing money, you want the lowest interest rate possible, compounded as infrequently as possible.
It's worth noting that the interest rates on even the best high-yield savings accounts barely outpace inflation, so they're best for short-term savings. If you want to build long-term wealth, whether that's saving for retirement or a goal that's years away, investing your money will really get it working for you.
When comparing loans, credit card APRs, savings account APYs, or other securities' returns — check the frequency at which the interest compounds, and make sure you're comparing like to like. Two interest rates can be nominally the same, but if they compound at different speeds, it can make a difference.
Ultimately, whether earning it or paying it, the nature of compound interest means that getting on top of it early on is exponentially better for your wallet and budget.
The basics of a compound interest calculator
Key components of a compound interest calculator
When using a compound interest calculator, there are several pieces of information you'll need to know ahead of time. These are the principal amount (the amount of money you start with), the interest rate you're earning, the compounding frequency, and the time period you're interested in using for your calculations.
Principal amount
The principal amount is the money that you start off with. For savings accounts, this is generally the money you open the account with. For investments, this is the money you start the investment with. And for loans, such as a personal loan, this is the initial amount of money you get from the loan.
Interest rate
The interest rate is what you're earning or paying on top of your initial principal. For investments, this is also sometimes called the rate of return. The interest rate generally does not include compounding interest in its calculations; for example, if you have a CD rate of 4.50% and the CD compounds interest daily, you'll actually be earning slightly more than 4.50% in interest over the course of a year.
You might also see people talk about annual percent yields or annual percentage rates. Both APYs and APRs take compounding interest into account; because of that, they tend to be slightly higher. They are a better representation of how much money you'll actually earn or owe at the end of the time period you're interested in. This can also be called the annual effective rate, and you can use an effective annual rate (EAR) calculator to find out what yours is.
Compounding frequency
The compound frequency is how often interest is calculated and added to your principal amount. Your interest can compound daily, weekly, monthly, quarterly, or yearly. If you're earning money, whether through a high-yield savings account offered by an online bank or through an investment, you'll want a quick compounding frequency, since interest builds up faster with shorter compounding times.
If you're borrowing money, whether for a mortgage, car loan, credit card, or something else, you want a slow compounding frequency, as that will cost you less money over time.
Time period
The time period is the amount of time you want to measure compound interest across. For example, if you want to see how much interest you'll earn in five years with a 5-year CD, you'll enter five years as the time period.
While it's not required, you might want to include regular contributions in your calculations. Regular contributions are additional amounts of money you add to your investment or savings. This does not include the money you use to open the savings account or investment account. You'll want to know how much you've added, as well as how frequently you add it, if you're using regular contributions as part of your calculations.
The power of compound interest
Compound interest is a kind of interest based on adding the original principal with the accumulated interest from previous periods. In other words, with compound interest, you earn interest on previously earned interest. Because of this, compounding interest makes the principal grow exponentially, meaning as interest accrues and the quantity of money increases, the rate of growth becomes faster. This can help you reach savings goals more quickly.
How compound interest works
How quickly your money grows with compound interest depends on the interest rate and the frequency of compounding. Interest can be compounded daily, monthly, quarterly, or annually. The more frequently it's compounded, the faster it accumulates.
The impact of compounding frequencies
Daily vs. monthly vs. annually compounding
If you're the one earning money off the interest, daily or monthly compounding is preferable to yearly. Since money is put into your account more frequently, more interest is counted when compounds happen. As an example, let's say you put $5,000 in an account offering a 10% rate of return for one year. If your interest compounds annually, no interest will be added to your principal amount, so you'd get $500 added to your account by the end of the year. This is the same amount you'd get if the account offered simple interest, since the interest only compounded once.
Comparatively, if your interest compounds monthly, some of the interest you make in that year will earn its own interest. In this case, you'll end up with $5,524 at the end of the year. With daily compounding interest, you'll have $5,526 at the end of the year.
While these differences may seem small, they get much bigger when the dollar amount you're working with increases, or if you let the interest build up longer. You could end up with hundreds or thousands of dollars more if you choose daily or monthly compounding interest over yearly.
On the other hand, if you're being charged interest, like with a mortgage, monthly or yearly compounding will save you money compared to daily.
Common mistakes to avoid
Overlooking compounding frequency
It can be easy to overlook compounding frequency when choosing things like bank accounts or loans, but it can make a big difference. If you're comparing offers that list similar interest rates, make sure to check if interest compounds daily, monthly, quarterly, or yearly. If one offers daily compounding and another offers yearly compounding, you could end up earning or owing very different amounts of money.
How compound interest can work against you
As beneficial compounding interest can be for saving, investing, and wealth creation, it's important to note that it can work against you if you're paying off debt. In fact, compounding is part of what makes carrying an outstanding credit card balance so costly.
For example, let's say you carry a $10,000 balance on a credit card. We'll assume its interest rate is 4% compounded daily, even though credit card APRs are usually much higher. You plan not to put anything else on the card and pay it all off in five years. Even though you'd be chipping away at your balance and paying an extremely low interest rate, you could still end up paying a lot in interest charges — more than $1,000, in fact.
And if you were being charged 18% compounded daily — which is closer to the average credit card interest rate — you would pay $5,236 in interest after five years. That's a substantial additional cost and could make it much more difficult to pay off your balance.
Ignoring tax implications
Keep in mind that you will need to pay taxes on interest you earn from your savings account or CD, including compound interest. Since you're earning more money in a year if your investment or bank account uses compound interest, you might have to pay more in taxes than you expect.
Make sure to plan ahead so you aren't surprised come tax season. Using financial planning tools can help you stay aware of exactly how much money you're making in interest.
Similarly, tax software may help you to remember to include your interest earnings when the time comes to pay your taxes.
And for the record, in case you were wondering: compound interest is not the same thing as compound annual growth rate (CAGR).
Not contributing to savings
While compounding interest can help you earn more on the money you have in your savings account, you won't make much progress if you aren't also regularly contributing to your savings. How much you put in your account each month will depend on your budgeting strategy. For example, the 50/30/20 rule and the 70/20/10 rule both suggest putting 20% of your monthly income into savings and investments, while other strategies recommend basing your contribution amount on your savings goals — but you should be contributing consistently each month if possible.
For example, if you start with $5,000 in your emergency fund savings account with 5% interest that compounds daily, and you don't make any additions, you'll have $6,420 in your account at the end of five years. If you contribute just $100 into the account consistently each month, You'll have $13,236 — over double what you'd have if you didn't contribute.
Not considering bank account types
While interest rate and compounding frequency are important, you should also consider the type of bank account you're opening when deciding where to store your savings. Don't keep all of your savings in your checking account just because it's convenient; using another type of savings account can not only help you earn a higher interest rate, but also help you not accidentally spend your savings.
When looking for a new account for your savings, you might be interested in a high-yield savings account, a money market account, or a certificate of deposit.
High-yield savings accounts are the most straightforward; they're like traditional savings accounts, but they earn significantly more interest. Savings accounts don't generally let you use debit cards or checks, and many limit how many times you can withdraw money each month. This makes your money a little bit harder to get to, but it also keeps you from accidentally spending money you meant for a savings goal. Some savings accounts, such as savings accounts with buckets, even come with budgeting features.
If you want more access to your funds while still earning high rates, you might consider a money market account. Money market accounts generally come with check-writing privileges or debit cards, but they give higher rates on average than checking accounts. They might still put limits on how many times you can withdraw money a month, though, and many money market accounts have tiered interest, which means you'll need to keep more money in them to earn the highest rates.
Both of these accounts offer variable interest, which means the interest rate can change at any time. If you don't want to risk your rate dropping, you might want to consider a certificate of deposit. CDs offer a fixed interest rate for their entire term length, but in exchange you can't withdraw your money until the end of the term length without paying significant early withdrawal penalties.
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FAQs on compound interest calculators
A compound interest calculator is an online tool that helps you figure out how much interest you'll earn on an investment, bank account, or loan that uses compound interest. This means it uses both your principal amount and the interest you get on that principal over time in its calculations.
You need a few pieces of information when using a compound interest calculator: the principal amount, the interest rate, the compounding frequency, and the time period that the money is invested, saved, or borrowed. Once you give the calculator that information, it will provide you with the total amount that will be accumulated at the end of the given period.
The compounding frequency is how often the interest is calculated and added to the principal amount. Common compounding frequencies are daily, weekly, monthly, quarterly, and yearly. The more frequently your interest compounds, the more you earn or pay in the long run.
Yes, many compound interest calculators let you include regular contributions in your compound interest calculations. You'll need to enter the additional contribution amount and the frequency of your contributions if you want them to be included.
Different calculators might use slightly different formulas and rounding methods. They also might assume different things about when contributions are made (at the beginning or end of compounding periods) and how the final interest is calculated.
