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What Is Compound Interest?
Compound interest is a form of interest calculated using the principal amount of a deposit or loan plus previously accrued interest. Unlike simple interest, which doesn’t apply to previously accrued interest, compound interest allows your money to grow exponentially over time. Use the compound interest calculator below to determine how much interest you can earn in a savings account.
How to Use the Compound Interest Calculator
To use the compound interest calculator, enter the following information and select Calculate.
- Initial deposit. How much will you deposit when you open the account?
- Regular contributions. How much will you deposit on a recurring basis?
- Contribution frequency. How frequently will you make regular contributions?
- Years for growth. How long do you intend to let your savings grow?
- Interest rate. What APY does the account earn?
- Compounding frequency. How often does the bank compound interest?
How Does Compound Interest Work?
With savings accounts, compound interest works by adding interest you earn to the funds you’ve deposited. Different banks add—or compound—interest at different rates, known as the compounding frequency. Many banks compound savings account interest daily, but some compound it weekly, monthly or even quarterly.
With deposit accounts—such as savings accounts—compound interest allows interest you earn to accrue interest itself. A savings account’s compound interest rate is typically expressed as an annual percentage yield (APY).
With credit cards, loans and other lending products, compounding interest means you’ll have to pay interest on interest that’s tacked onto your balance. The compound interest rate lenders charge is usually expressed as an annual percentage rate (APR).
Where Is Compound Interest Used?
Besides savings accounts and CDs, several other financial products can earn compound interest, including bonds, money market accounts, high-yield savings accounts, dividend stocks and real estate investment trusts.
Credit card companies and other lenders also use compound interest to calculate your debt. Most credit card companies compound interest daily by adding the interest you owe to your principal balance.
