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Compound interest calculator

Find out how compound interest can help you grow your savings.

As your savings get larger, compound interest works faster, making it one of your most powerful wealth-building tools. Use our calculator to find out how much you could earn with compound interest.

How do banks calculate compound interest?

With most savings accounts, interest is calculated every day on your daily closing balance.

Compound interest formula

Here’s the equation that most banks use for savings accounts:

(Daily closing balance) x (interest rate)
365

Interest begins to accumulate on the day of your first deposit. It’s then credited to your account on the last day of each month. If you close your account, your accrued interest is deposited on the day it’s closed.

Any interest awarded to your savings account is typically available for use on the same day it’s credited.

Use our compound interest calculator

How can I figure out compound interest?

Compound interest is a complicated calculation that’s often easier left to online calculators designed for that purpose. Still, you can refer to the same formula banks use to calculate your compound interest:

Daily closing balance x interest rate percentage / 365

Say you invest $1,000 with an interest rate of 10% compounded annually for 5 years. Using the compound interest formula, you’ll find that your initial investment of $1,000 earns $100 after the first year, giving you a total of $1,100.

That amount will then grow by 10% the following year, bringing your balance to $1,210. This amount is compounded the third year, and so on. After 5 years, your original balance would have grown to $1,610 due simply to compounding interest.

How does compound interest work in technical terms?

Think of compounding as a way of earning interest on your interest. The amount you invest in a savings account earns interest, which is rolled into the total investment. The total investment continues earning interest – only this time, on a bigger balance than before.

Compound interest differs from simple interest, which is typically associated with loans. For loans, simple interest is calculated on the principal — or the original loan amount – only. Interest is not part of the calculation.

Again, it’s complicated. But we can get an idea of the benefits of compound interest on your savings by analyzing the mathematical formula associated with it:

Screenshot 2015-10-14 10.57.13

Here’s what those symbols represent:

  • A – the future value of your total investment, including earned interest
  • P – your initial deposit amount or principal investment
  • r – the interest rate annually as a decimal
  • n – how often interest is compounded each year
  • t – the number of years the money is invested for

For most savings accounts, your interest is compounded monthly – or 12 times in a year. For long-term savings products, like Guaranteed Investment Certificates (GICs), the formula or compounding period may differ.

Example: How compound interest helps your savings grow

To better understand the benefits of compound interest, take a look at the following example:

Here, Miles deposits $5,000 into a standard savings account that pays interest at a rate of 1.5%.

Interest is calculated daily and deposited into the account at the end of each quarter:

Principal (P)Rate (r)Compound (n)Time (t)Interest earned after 1 year
$5,0001.5%41$75.42

At that same rate for the next 5 years, here’s how much he’ll earn:

Principal (P)Rate (r)Compound (n)Time (t)Interest earned after 5 years
$5,0001.5%45$388.66

If interest is paid annually, here’s where Miles’s interest earnings would stand after 5 years:

Principal (P)Rate (r)Compound (n)Time (t)Interest earned after 5 years
$5,0001.5%15$386.42

If interest is compounded daily, here’s interest earnings after 5 years:

Principal (P)Rate (r)Compound (n)Time (t)Interest earned after 5 years
$5,0001.5%3655$389.41

Note that for accurate calculations, you can’t account for any withdrawals or fees deducted from the balance over the period you’re calculating. Adding to your balance also changes your results. (That’s why we said it’s complicated!)

* This is a fictional, but realistic, example.

Bottom line

A savings account with compound interest can help you reach your financial goals sooner – all you have to do is just let your money sit in the account. Most of today’s savings accounts use compound interest, but you should check the terms and conditions to be sure. Or, you can compare some of our top-rated options to find out about other popular savings accounts on the market.

Compound interest FAQs

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Written by

Peter Carleton

Peter Carleton is a freelance writer that covers banking and investing, breaking down what you need to know about where you put your money. When Peter's not thinking about cutting-edge banking apps and robo-advisors, he runs a creative agency and spends his spare time cooking or reading. See full profile

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