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 continually adding interest you earn to the funds you’ve deposited. This allows your interest to accrue interest itself. Different banks add—or compound—interest at different rates, known as the compounding frequency.
Many banks compound interest daily, but some compound it weekly, monthly or even quarterly. The more frequently a bank compounds your interest, the faster your money will grow. But depending on your balance and interest rate, the difference between daily and monthly compounding might only be a matter of pennies. A savings account’s compound interest rate is typically expressed as an annual percentage yield (APY).
Compound interest can also work against you when you have to pay it. Most lenders and credit card providers charge compound interest. So you may pay interest on your interest if you carry a balance from month to month. 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.
Frequently Asked Questions (FAQs)
Is compound interest exponential?
Yes. Unlike simple interest, which grows at a linear rate, compound interest grows exponentially. This allows small amounts of money to turn into massive sums over time.
Do checking accounts earn compound interest?
Most checking accounts from big banks don’t earn interest, but several credit unions and online banks offer checking accounts that accrue compound interest. Compare the best high-yield checking accounts to see what APYs you could earn.
What types of accounts earn compound interest?
Savings accounts, money market accounts, dividend stocks and zero-coupon bonds all earn compound interest. A growing number of checking accounts earn compound interest too.
