Earning interest on a balance means money in your pocket, but what happens when you reinvest this amount to continue earning interest on itself? This concept is known as compound interest and is a great way to maximize your earnings from long-term investments. This calculator will help you quickly figure out how much compound interest you’ll earn by providing just a few simple details.
Compound Interest Calculator
What is compound interest and how is it calculated?
Compound interest refers to interest that not only accumulates on a balance, but also continues to earn interest on itself. For example, if you deposited $1,000 into a savings account with a 1% interest rate, you’d earn $10 in interest during the first year and end up with a final balance of $1,010. In the second year, however, you’d earn $10.10 as the interest earned in the first year became included in the calculation, for a total balance of $1,020.10. Thanks to compound interest, the dollar amount of interest earned would continue to grow each year, even if you didn’t contribute anything else to the account.
How the compound interest calculator works
If you’re still not sure how much interest you would earn on a particular amount, this compound interest calculator makes it easy to see how much you could save. First, enter the amount you intend to use as an initial deposit and how much you plan to contribute on a monthly or annual basis. Next, adjust the calculator for the interest rate offered by the account you’ll be using. Finally, select the number of months you want to see in the calculation. The compound calculator will tell you what the account balance will be after this time has elapsed and provide you with a visualization of the total balance growth and interest earned.
- Initial deposit: The amount you intend to deposit when you open the account. Some banks require a minimum initial deposit, so check the fine print on the account details to make sure your balance will be sufficient.
- Recurring contributions: How much you plan to contribute to the account and with what frequency. Some people prefer making annual deposits, while others find it easier to make smaller transfers on a monthly basis.
- Estimated Rate of Return: The true annual rate (or APY; Annual Percentage Yield) offered by banks. This rate takes into account the compounding interest effect and is typically higher than the interest rate.
- Time span: The amount of time you plan to keep money in the account earning interest. Withdrawing funds early will reduce the amount of interest you earn.
The final word
A compounding interest calculator is the fastest way to understand exactly how much interest you’ll accumulate by continuing to reinvest earnings into the same account. Compound interest may seem like it doesn’t make much of a difference at first, but it can lead to huge savings over years or decades. Try making adjustments to the compound interest calculator to see how much more you might earn with a slightly higher initial deposit or by waiting longer to withdraw the funds.