I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
Use this handy compound interest calculator to estimate how much your money will grow through the years.
How to Use This Compound Interest Calculator
To see how much your money will multiply, you need a few pieces of information:
- The amount of your initial deposit
- How much and how frequently you plan to deposit in the future
- How long you’ll invest your money for
- Your estimated interest rate
- Optionally, your compound frequency (although you can get a rough estimate without knowing this)
For example, if you start with $1,000 and add another $100 every month, at a monthly compounding 1% interest return, you’d have $27,777 at the end of 20 years: $25,000 from your contributions and $2,777 from interest.
If instead of that 1% interest rate (above average for a savings account), you invested with a 10% rate of return (about average for the S&P 500), you’d have $83,265 after 20 years.
Even though you’d contribute the same $25,000 over those years, you would earn $58,265 just in interest alone because of the higher interest rate.
What is Compound Interest?
Like a snowball rolling down a mountain, continuous compound interest grows exponentially over time.
To visualize this, imagine a puzzle: Would you rather have $2 million in cash right now or a single penny that doubles every day for 30 days?
Although it seems as though the $2 million is the easy answer, a single cent at a 100% daily compound rate is worth more.
On the first day, it’s only worth 1 cent, but the next day it’s worth 2 cents, then 4 cents, 8 cents, 16, 32, 64, $1.28, and so on.
After 30 days, that penny will have turned into over $5 million. After another 30 days, it would be over $5 quintillion.
While the average checking account earns 0.03% each year and not 100% each day, this same principle applies: Every year, your account grows by the same percentage, but since that percentage will be multiplied by a larger amount each year, your account grows exponentially over time.
Compound Interest Definitions
Here are a few key terms to help you understand compound interest:
Initial deposit – Your initial deposit is how much money you start with. The larger your initial deposit, the faster your money will start to multiply.
Contributions – Any time you add money to your account, that is a contribution. For example, if you take money from your paycheck and add it to a savings account, you’re contributing to that savings account.
Time span – The time span is how long you’ll let the money collect interest before taking it out. Since compound interest grows exponentially, each period will grow faster than the period before it, so a longer time span will significantly increase the amount of interest you earn.
Rate of return – The rate of return is the percentage you expect to earn on your investment each year. Some types of investments guarantee a rate of return (for example, some savings accounts have a guaranteed interest rate), while other investments are speculative (for example, the S&P 500 has historically had a 10% rate of return, but it could perform better or worse than that in the future).
Interest rate – Your interest rate is an annual percentage that the borrower pays to the lender as compensation for borrowing money.
In a personal loan, credit card, or mortgage, you pay a financial institution to use their money, but in a savings or investment account, you’re essentially lending your money to the financial institution, and they may pay you an interest rate.
Compound frequency – Interest rate is an annual amount, but different institutions may calculate that differently: they could calculate it at the full amount at the end of each year, divide it by 12 and calculate it every month, or divide it by 360 (the “banker’s year”) and calculate it every day.
The more frequently your financial institution compounds your interest, the faster your money multiplies, although this is a much less significant factor than return rate and time span.
Below are answers to questions about compound interest:
How do I calculate compound interest?
Compound interest builds on itself, so you have to multiply the total by the return rate for each compounding period of time.
For example, to calculate 1% annually compounding interest on a $100 loan for 10 years, you would calculate $100 x 1.01 and then multiply that result by 1.01, and so on for a total of 10 calculations. (The answer, by the way, is $110.46.)
How does compound interest work?
Compound interest works because borrowers pay lenders a set percentage to borrow their money.
Each period, the borrower adds the amount they pay in interest to the total balance, so in each period, they’re multiplying the percentage by a larger amount each time.
How do I open a compound interest account?
Most banks and credit unions offer a variety of financial products that offer compound interest, such as savings accounts, certificates of deposit, IRAs and Roth IRAs, etc.
Talk to your financial institution to see what products they can recommend.
Grow your savings with a high-yield cash account. Betterment’s Cash Reserve secures your money during volatile times while earning 15x the national average.
I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.More Posts