Managing Money In A Crisis
Weekly tips sent straight to your inbox
Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our opinions or reviews. Learn how we make money.
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
-
Make $75,000+ and have income-driven student loan repayments? You could be paying too much, study says
Refinancing with another lender or even switching repayment plans can free up room in your budget and even save on the total cost.
-
Checking fees hit record high; here’s how to lower yours
New study reveals having the wrong checking account can be costly. Explore your options.
-
Citi Elevate checking review
Earn a competitive rate as long as you open it with the Citi Accelerate Savings account.
-
Is Swagbucks legit?
Here’s how much you can earn using Swagbucks.
-
Copper Banking review
This digital checking account teaches your teen healthy money habits through interactive quizzes and an intuitive mobile app.
-
Varo Savings Account Review
Learn how this high-interest account can boost your savings goals.
-
Chase First Banking review
A bank account for kids that helps your child develop healthy money habits early on. Powered by Greenlight.
-
American Debt Relief review
American Debt Relief can save customers around 30% of the debt they enroll. But there are a few red flags.
-
Nationwide Advantage checking review
The Nationwide Advantage checking account offers a decent APY and no fees.
-
How to find the best community bank lender for your small business
Developing a long-term relationship with your local banker can be a great investment for your business.
Ask an Expert