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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 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?
How does compound interest work?
With savings accounts, compound interest works by continually adding the interest you earn to the funds you have deposited. This allows your interest to accrue on its own. Different banks add or compound interest at different rates, known as compounding frequency.
Many banks accrue interest daily, but some accrue 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 may only be a matter of pennies. The compound interest rate for a savings account is usually 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 can pay interest on your interest if you carry a balance from month to month. Compound interest rate lenders’ fees are usually expressed as an annual percentage rate of charge (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-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.