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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.
With deposit accounts, such as savings accounts, compound interest allows the interest you earn to accumulate on its own. The compound interest rate for a savings account is usually expressed as an annual percentage yield (APY).
With credit cards, loans, and other lending products, compound interest means you’ll pay interest on the interest added to your balance. The fees of compound interest rate lenders are usually expressed as an annual percentage rate (APR).
Use the compound interest calculator below to determine how much interest you can earn in a savings account.
How does compound interest work?
With savings accounts, compound interest works by adding the interest you earn to the funds you have deposited. Different banks add or compound interest at different rates, known as compounding frequency. Many banks accrue interest on savings accounts daily, but some accrue interest weekly, monthly, or even quarterly.
How to Use the Compound Interest Calculator
To use the compound interest calculator, enter this information and select Calculate.
- Initial deposit. How much will you deposit when opening the account?
- Regular contributions. How much will you deposit on a recurring basis?
- Frequency of contributions. How often will you make regular contributions?
- Years of growth. How long do you plan to grow your savings?
- Interest rate. What APY does the account earn?
- Dialing frequency. How often does the bank compound interest?
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-paying 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 main balance.
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