Your savings account balances and investments can grow faster over time through the magic of compound interest. This financial concept has some math behind it, so use the compound interest calculator below to see how big a difference it could make for you.
When you’re done, keep reading to understand why you should start saving as early as possible for long-term goals such as retirement.
Helpful hints
- To really see your earnings skyrocket, try your calculation both with and without a small monthly contribution — say, $25 to $100 — depending on what you can afford.
- Our compound interest savings calculator includes a starting interest rate. To see what interest you can expect, compare rates on NerdWallet for thousands of savings accounts.
- Convinced? Start saving with some of our favorite savings accounts or IRA providers.
Here’s a deeper look at how a compound interest formula works.
Simple interest vs. compound interest
When you open an interest-bearing financial account, you put in an initial amount, called the principal, and earn a percentage return off that deposit, called the interest. A simple interest rate is a percentage of the original principal, so the amount of interest earned annually remains the same every year. For example, if you have a 4% interest rate on a $10,000 deposit for five years, you earn $400 in interest each of those five years, or a total of $2,000 in interest.
In an account with compound interest, the return gets added to the principal at the end of every compounding period, such as a year, month or day. Each time interest is calculated and added to the account, the higher principal results in more interest earned than before. For example, if you put $10,000 into an account with a 4% rate of return per year for five years, you’d earn $400 in interest the first year, $416 the second year, and so on. After five years of compounding, you would have earned a total of $2,167 in interest.
» MORE: The smartest financial decision you’ll ever make
Compounding frequency
Growing $10,000 to $12,167 at a 4% return results from an annual compounding period, but the period, or the frequency that interest gets paid, can vary. Compounding also can occur quarterly, monthly or daily. So the rate of return, which banks usually promote in terms of an annual rate, gets compounded at the end of each period: 12 times for monthly and 365 for daily.
If the 4% interest on that $10,000 investment is compounded monthly or daily, the result is a slightly higher return over time as compared with annual compounding:
| Balance after one year | Balance after five years | |
|---|---|---|
| Annual compounding | $10,400 | $12,167 |
| Monthly compounding | $10,407 | $12,210 |
| Daily compounding | $10,408 | $12,214 |
Compounding with additional contributions
As impressive as compound interest might be, progress on savings goals also depends on making steady contributions.
More calculators
Let’s go back to the original example above: By depositing $1,000 annually in to the five-year compounding plan of $10,000 at the 4% rate of return, you’d end up with $17,583 after five years, when compounded annually. The interest would be $2,583 on a principal of $14,000, which is $416 more interest over five years than it would be without additional contributions.
Compound interest can help drive your long-term savings goals, especially if you have time to let it work its magic over years or decades. You can earn far more than what you started with.
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