You can use our interest calculator to figure out how much your savings and investments could grow over time. In the article below, we explain what compound interest is and how it can help you reach your money goals.
In times gone by, folks had to convert values on paper. However, in the present day, paper is used for conversions of pounds to Kilograms, centimeters to yards and so forth. Nevertheless, in this age, calculators are at our disposal.
Disclaimer: We worked hard to make our calculator tools, but we can't be held responsible for any damage or loss of money that comes from using them or has anything to do with them. Full disclaimer.
Using our calculator for interest
With our compound interest calculator, you can figure out how much interest you might earn on your savings, investments, or 401(k) over a number of years and months based on how many times you compound per year.
Just put in your initial investment (the principal amount), the interest rate, how often you want the interest to be compounded, and how long you want to save or invest for. You can factor in regular deposits or withdrawals to see how they affect the future value.
How does interest add up?
Compound interest, also called "interest on interest," means that the interest you've already earned is added back to your principal sum. Future interest calculations are based on both the original principal and the interest you've already earned.
When you combine the power of compounding interest with regular, consistent investing over a long period of time, you get a very effective way to grow the value of your savings or investments over time.
Watch this short video to see how compound interest works...
How important is it that interest builds up? Just ask Warren Buffett, who is one of the best investors in the world:
"I'm rich because I live in the U.S., because I have some lucky genes, and because my money has grown over time."
How do you figure out compound interest?
The following formula is used to figure out compound interest: A = P(1+r/n)nt. For annual compounding, multiply the initial balance by one plus your annual interest rate multiplied by the number of time periods (years). This gives a total amount for the principal and the interest that keeps adding up.
Let's look at what each part of the compound interest formula is:
Where: A = P(1+r/n)nt,
A = the investment's value in the future
P = the balance on the principal
r = the interest rate per year (decimal)
n = number of times per year that interest is added to the principal
t = how many years have passed =... to the power of...
How to figure out the monthly interest
Here's how to use our compound interest formula to figure out monthly compound interest. Interest that is compounded once a month means that our interest is added up 12 times a year:
Divide your annual (decimal) interest rate by 12 and then add 1.
Raise the number that you get to the 12th power of the number of years.
Multiply the result of step 2 by the amount of your principal (P).
If you only want the interest, take the balance of the principal out of your answer from step 3.
In our article about the compound interest formula, we explain how to use it step by step and show how it can be used in the real world.
For the rest of this article, we'll look at how savings and investments can benefit from compound interest.
What's good about compound interest
I think pictures are a great way to help people understand ideas, and this is no different. When you look at a graph of long-term growth, you can see how powerful compound interest is.
Here is an example of a graph for a first investment of $1,000. To keep the math simple, we'll use a longer compounding time (20 years) at 10% per year.
When we look at our graph and compare the line for compound interest to the lines for standard interest and no interest at all, it's easy to see how compound interest increases the value of an investment over time.
In 20 years, how much will $10,000 be worth?
Let's use a more realistic example to show how interest builds up year by year. Let's say you have $10,000 in a savings account that earns 5% per year and adds up the interest each year. We'll assume that you plan to do nothing with the investment for 20 years. This is how your investment plan looks...
Calculate Interest for a Year
Interest Earned Balance at the End
Year 1 $10,000 x 5%
Year 2 $10,500 x 5%
Year 3 $11,025 x 5%
Year 4 $11,576.25 x 5%
Year 5 $12,155.06 x 5%
The interest rate used in these examples is a fixed percentage per year. If you invest your money instead of putting it in an account with a fixed interest rate, your returns will change from year to year because of changes in the economy.
Diversification is often recommended by experts in the field as a way to reduce risk because of this.
Adding to itself with more deposits
Combining regular deposits with interest compounding in your savings account, SIP, Roth IRA, or 401(k) is a very effective way to save money that can really help your money grow over time. 4
Looking back at the example we used above, if we put an extra $100 per month into our investment, our balance would reach $67,121 after 20 years. This is because we would have earned $33,121 in interest on our total deposits of $34,000.
Financial institutions point out that if people start investing regularly early in life, their savings can grow by a lot in the future as their interest snowball grows and they get the benefits of Dollar-cost or Pound-cost averaging. 5
Where to put money to earn interest over time
People are sending us emails asking where they should invest to get the most compound interest. They are thinking about mutual funds, ETFs, MMRs, and high-yield savings accounts and want to know which is best.
At The Calculator Site, we work hard to make good tools that can help you figure out your finances. We can't tell you, though, where you should put your money to get the best return. Instead, we suggest that you talk to a qualified financial advisor about what you should do based on your own situation.
There are also some great articles from well-known financial websites that list ways to invest for compound interest. Here are the best two articles that will help you with your research:
12 Best Investments with Interest That Adds Up. Young and the Serious (author: Riley Adams).
How to Use Interest Accounts That Add Up. The Motley Fool (author: Mike Price).