Sign up & start saving!
Get our weekly newsletter for the latest in money news, credit card offers + more ways to save
Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
Compound interest calculator
Find out how compound interest can help you grow your savings.
Compound interest is an effective tool that helps your money grow faster. Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated based on your growing balance, including any interest you’ve already earned. Use this calculator to find out how much you could earn with the power of compound interest.
Calculate your 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 into 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.
How can I calculate the 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 five 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.
The total amount yielded for the first year will then earn $110 — 10% of $1,100 — as interest for the next year, bringing your balance to $1,210. This amount then becomes the base for compounding for the third year, and so on. After five years, your initial balance would total $1,610 due to compounding interest alone.
How does compound interest work in technical terms?
Think of compounding as a way of earning interest on your interest. A savings account with ongoing compound interest applies interest to the interest that you’re already paid.
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.
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:
Here’s what those letters and annotations 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 certificates of deposit, the formula or compounding period may differ.
Case Study: How compound interest helps your savings grow
To better understand the benefits of compound interest, take a look at how one saver’s account grows depending on any number of factors found with your typical savings account.
Here, Miles deposits $5,000 into a standard savings account that pays interest at a rate of 3.5%.
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 |
|---|---|---|---|---|
| $5,000 | 3.5% | 4 | 1 | $177.31 |
At that same rate for the next five years, here’s how much he’ll earn:
| Principal (P) | Rate (r) | Compound (n) | Time (t) | Interest earned after 5 years |
|---|---|---|---|---|
| $5,000 | 3.5% | 4 | 5 | $951.70 |
If interest is paid annually, here’s where Miles’s interest earnings would stand after five years:
| Principal (P) | Rate (r) | Compound (n) | Time (t) | Interest earned after 5 years |
|---|---|---|---|---|
| $5,000 | 3.5% | 1 | 5 | $938.43 |
If interest is compounded daily, here’s interest earnings after five years:
| Principal (P) | Rate (r) | Compound (n) | Time (t) | Interest earned after 5 years |
|---|---|---|---|---|
| $5,000 | 3.5% | 365 | 5 | $956.18 |
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. We did say it’s complicated.
Compare savings accounts with compound interest
Bottom line
A savings account with compound interest can help you reach your financial goals sooner, just for letting your money sit in the account. Most of today’s savings accounts use compound interest, but you should check the terms and conditions because it can help your balance grow much faster than an account with simple interest. Or, you can compare some of our top-rated options to find out what other savings accounts are out there.
Frequently asked questions
More guides on Finder
-
Work for yourself? You might qualify for a larger PPP loan
You can now calculate your payroll expenses based on gross income instead of net profit. Here’s how it works.
-
Apps like Acorns
Acorns alternatives offer lower fees and more investment options. Learn more.
-
CIT Savings Connect account review
CIT Savings Connect combines aspects of a checking and savings account in one product.
-
Should you sell on Poshmark or Tradesy?
Compare pros and cons of selling on Poshmark vs. Tradesy to help you get the most for your secondhand clothing, shoes and accessories.
-
Capital One savings account interest rates for 2021
See how much interest you could earn with a savings account from Capital One.
-
How to start investing in your 20s: 7 tips for beginners
7 tips for starting a portfolio if you’re new to investing.
-
Citi savings account interest rates for 2021
An online savings account with a tiered interest model but not-so-competitive rates.
-
How can you use your health savings account (HSA) as a retirement investment?
A health savings account (HSA) can help you get prepared for your retirement. Learn more.
-
How to deal with debt when you have bad credit
Credit counseling, debt relief programs and more options to consider.
-
Best balance transfer credit cards of 2021
Here are our top balance transfer picks for 2021.
Ask an Expert