Compound Interest Calculator: How Much Interest Will You Earn?
Use the compound interest calculator interactive tool to see how fast you can meet your savings goals with compound interest vs. simple interest.
Savings rates are still high, and banks are still offering competitive rates. Here are our top picks for those who want to earn the highest interest on their savings.
Why Is Compound Interest Better?
Simple interest is calculated on the initial sum of money deposited. If you deposit $1,000 in an account with a 3% annual simple interest rate, you’ll earn $30 in interest each year.
Compound interest is more powerful, as it’s calculated on the principal amount plus accumulated interest. If you deposit the same $1,000 in the previous example in an account for two years with a 3% annual compound interest rate, your interest in the first year is the same $30, but in the second year, you earn interest on $1,030, not just the original $1,000, leading to more total interest accrued over time.
How to Use the Compound Interest Calculator
Follow these instructions to calculate compound interest.
The compound interest calculator has four input boxes. Enter your information and hit Tab to move to the next field.
Step 1: Enter the Amount of Your Initial Deposit
Enter the funds you have available to start saving. Don’t bother with dollar signs or commas – the calculator will take care of those automatically.
Step 2: Enter the Number of Years You Plan to Save
Enter the years you will keep that money on deposit in your account. If you’re unsure, try using one year or two years and then a longer period to see the difference.
Step 3. Enter Your Estimated Rate of Return
Enter the interest rate on your current bank account or one you are considering. Once you enter a deposit amount, the calculator displays featured bank offers. You can click on one of these so the calculator will automatically show how their interest rate will grow your money, or you can enter a rate yourself.
Step 4. Enter How Often the Interest Will be Compounded
Select a compounding frequency from the menu: Daily, Monthly, Semi-Annually, or Annually. Note that if you enter an APY rather than a simple interest rate, choose “Annually” because APY already accounts for the compounding frequency.
Step 5. Click “Calculate” and Get Your Results
When you click the Calculate button, your results will appear below. The amount shown is how much money you will have saved at the end of the compounding period you selected. However, this does not consider the effect of any fees on the performance. Be sure to check the fee schedule carefully before opening an account.
What Is Compound Interest?
When an account earns interest and that interest is kept in the account, the interest earned previously begins to earn interest itself. Here’s a simple example:
- $100 earns 10% interest, which is $10 in interest accumulated, making the account worth $110.
- In the next period, that $110 earns 10% interest, which comes to $11 in interest, making the account worth $121.
Note that the account earned more in the second half even though the daily interest rate remained the same. That’s because it earned interest on both the original investment and the interest earned in the first initial investment period.
This process of earning interest on interest is known as compounding. It makes a big difference in how investments grow over a time period, and the longer you stay invested, the more compounding helps you.
Four factors determine how much interest your first savings plan will earn:
- Amount invested
- Annual percentage yield (APY)
- Compounding intervals
- Length of time invested
Compounding intervals refers to how often the bank credits interest to your account so you can start earning additional interest on the interest already earned.
If interest compounds daily, it means that if you earn interest one day, that interest starts earning interest the very next day; this is daily compound interest.
If an account is compounded monthly or annually, it will take a little longer for the interest you’ve already earned to start earning additional interest.
Compound Interest Formula Example
The future value of your savings or investment is influenced by several factors: the initial deposit (principal), the interest rate, the compounding frequency, and the duration of the investment.
For instance, if you invest $2,000 at a 3% annual interest rate for 2 years, your total interest will depend on whether the interest is compounded monthly, quarterly, or annually. The more frequently the interest is compounded, the more you earn.
To illustrate, consider a $1,000 deposit in an account with a 4% annual interest rate compounded yearly. After 2 years, this investment would grow to approximately $1,081.60. However, if the same rate of interest were compounded monthly, the total after 2 years would be slightly higher.
Understanding how to calculate interest helps one make more informed decisions about where and how to invest money for maximum growth.
Interest Rate vs. APY
Because interest compounds, the annual rate of interest you earn can be higher than the interest rate times the amount invested.
Applying the interest rate to the amount invested assumes that no compounding takes place during the year. However, if the account compounds interest more frequently than annually, it should yield additional interest due to the effect of compounding.
When the amount of interest produced each year after accounting for compounding is measured as a percentage of the amount invested, it is referred to as the annual percentage yield or APY.
How often an account compounds interest makes a subtle difference, but every little bit matters over time. That’s why you should always compare APYs rather than simple interest rates. APY includes the impact of how frequently the account compounds interest.
Watch Out for Other Factors Besides Interest and APY
APY is essential when shopping for deposit accounts, but it is not the only factor you should consider.
Here are three other factors to consider when choosing a deposit account:
Federal Deposit Insurance
Choose an account covered by federally-backed insurance through an FDIC-member bank or an NCUA-member credit union. Not all cash management products are eligible for this kind of federal insurance.
Fees
Some interest rates are not as reasonable as they look because you have to pay a regular fee to get that interest rate. Be sure to check on how much interest you earn, which will be offset by fees. In some cases, fees can wipe out all the other interest payments you earn.
Early Withdrawal Penalties
CDs generally offer higher interest rates than savings and money market accounts. Just be sure you are prepared to leave your money in the CD for the entire term of that CD, or you will probably have to pay an early withdrawal penalty.
Rate Tiers
Some banks apply different interest rates to varying sizes of deposits. One promotional trick is offering a great interest rate but only for a minimal amount. With that kind of rate tier, unless you are only making a small deposit, the monthly interest rate you earn may not be as good as the rate the bank advertises when you make additional contributions to the account.
Choosing the Right Type of Account to Earn Interest
Before comparing APYs and fees on deposit accounts, you must decide what type of account you want.
Money market accounts and savings accounts have very similar characteristics. Each one is designed for saving, produces interest, and allows you to withdraw your money at any time (though a few days’ notice might sometimes be required).
You can use money market and savings accounts in the same way. You can compare both types of accounts and choose the best APY with no fees and a minimum balance requirement you can quickly meet.
CDs are different. They typically require you to lock in your money for a specific amount of time, in return for which they usually pay higher rates than money market or savings accounts.
A critical factor in your decision is when you expect to need the money. If you’re confident you won’t need to withdraw the money for several months or even a few years, you can commit to a CD to earn a higher interest rate.
How to Find the Best Compound Interest Savings and Money Market Rates
Since savings accounts can be used in much the same way as money market accounts, you can consider both types of accounts and choose according to factors such as the following.
Can You Meet the Minimum Account Requirements?
Some accounts have different requirements for the amount of money you need to start an account and how much of a balance you must keep. Focus your attention on accounts with requirements your deposit will be able to meet.
How Competitive Is the APY?
Compare money market and savings account rates on the MoneyRates rates page, or start by looking at a few selected accounts at the end of this section.
Will the APY Apply to Your Full Account?
See if the account has different rate tiers that will affect how much your money will earn depending on how much you save.
Is There a Monthly Maintenance Fee?
These fees can diminish or wipe out your interest growth, so avoid them when choosing a savings or money market account.
FAQs
After 2 years, with a 6% interest rate compounded daily, $1,000 will grow to approximately $1,127.49.
The compound interest on a $100.00 loan at a 10% annual interest rate for 3 years (compounded annually) is $33.10.
