# Compound Interest Calculator

Written by Devon Delfino | Edited by Ali Cybulski | Published on 7/8/2024

A savings account that earns interest is the key to growing your money. Compound interest helps you build wealth faster than simple interest because you earn interest on the principal amount and any accumulated interest.

The DepositAccounts compound interest calculator can show you how much your savings will increase over time. Plug in your initial investment or current account balance, your annual percentage yield (APY), and a few other details about your savings plan to see how your investment will grow.

## What is compound interest?

Compound interest is when you earn interest on an account’s principal and the interest it accumulates.

Interest can be compounded at different intervals, such as daily, monthly, quarterly or annually. The more frequently interest is compounded, the higher the yield.

A \$100 investment that earns 5% interest and compounds daily grows to about \$105 in one year.

The longer you can take advantage of compounding, the more you can earn. That’s especially true if you contribute more money to your account over time. This is why so many finance professionals call compound interest “magic.”

### Compound interest vs. simple interest

The two types of interest are simple and compound. Simple interest is calculated only on the principal — or the amount invested or borrowed — while compound interest is determined on the principal and the accumulated interest.

Let’s say you put \$10,000 into a savings account that pays simple interest of 4% annually. After one year, you would earn \$400 — for a total of \$10,400. If you added nothing to the principal over the next five years, your balance would grow to \$12,000 from interest alone.

### Compound interest example

Interest can be compounded daily, monthly or quarterly, and the more often it is added to your balance, the faster your savings can grow.

Using the same \$10,000 example above, a savings account that earns 4% compound interest more than triples your annual interest payment after 30 years. Savings account rates can change over time, so your earnings will likely differ.

## Pros and cons of compound interest

### Pros:

• You are paid interest on your principal account balance and any previously earned interest.
• A small or large deposit can grow substantially over time, even if you don’t add to your investment.

### Cons:

• Compound interest rates can be variable and change anytime, cutting into your gains if rates drop.
• Interest can still take time to grow because rates typically sit well below 5%.
• Compound interest can be confusing, and the formula for calculating it can be difficult to use.

## What is the formula for calculating compound interest?

If you want to calculate compound interest on your own, you’ll need to use a basic equation:

A = P(1 + R/N) NT

A is your account balance after the bank pays you interest; P is your principal or original balance; R is the account’s annual percentage yield (APY); N is the number of times your bank compounds interest in a year; and T is the time, in years, you want to calculate for.

Let’s say you have \$5,000 in an account that earns 2% interest and compounds monthly. You’ll want to plug the appropriate variables into the equation:

• P = the principal amount of \$5,000
• R = the APY in decimal format, or 0.02 (divide 2 by 100)
• N = monthly compounding, or 12 times yearly
• T = 1 because you want to calculate interest after one year

Now, plug the appropriate numbers into the equation, and you’re ready to solve the formula using a calculator if you’d prefer.

5,000(1+ 0.02/12) 12 x 1 = \$5,100.92

You can also quickly estimate how long it will take for your money to double by using a simple formula called the Rule of 72. Here’s that formula:

72 expected interest rate

If your expected interest rate is 3%, divide 72 by 3. You would need roughly 24 years to double your money.

## How to make compound interest work for you

The best way to capitalize on compound interest is to let the funds you deposit stay in your account for as long as possible and also add to them. That means you’ll have to be patient and strategic with your money management to see the most gains.

You’ll also need to keep an eye on your account’s interest rate. Rates can change over time, and you may choose to go with another bank to get the best rate during market dips. Make sure that the account still works for your needs, whether as an emergency fund or a dedicated place to save for a home.

Once you’ve made the switch, you can use a compound interest calculator to forecast your potential growth and help you stay motivated to keep saving.