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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 our calculator to find out how much you could earn with the power of 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.
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 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.
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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.
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