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.
