Your savings account balances and investments can grow faster over time thanks to the magic of compounding. Use the compound interest calculator above to see how big a difference this could make for you.
Use this compound interest calculator
Try your math with and without a monthly contribution – say, $ 50 to $ 200, depending on what you can afford.
Here’s a more in-depth look at how composition works:
What is compound interest?
For savers, the definition of compound interest is basic: it’s the interest you earn on both your original money and the interest you continue to earn. Compound interest allows your savings to grow even faster over time.
In an account that pays compound interest, like a standard savings account, the return is added to the initial capital at the end of each funding period, usually daily or monthly. Each time interest is calculated and added to the account, the largest balance earns more interest than before.
For example, if you put $ 10,000 in a savings account with a 1% annual return, compounded daily, you would earn $ 101 in interest in the first year, $ 102 in the second year, $ 103 in the third year, and so on. following. After 10 years of compounding, you would have earned a total of $ 1,052 in interest.
But remember, this is just one example. For long-term savings, there are better places than savings accounts to store your money, including Traditional Roth or IRA and CD.
Compound returns on investment
When you invest in the stock market, you do not earn a fixed interest rate but rather a return based on the change in the value of your investment. When the value of your investment increases, you get a return.
If you leave your money and the returns you earn invested in the market, those returns are compounded over time in the same way interest is compounded.
If you invested $ 10,000 in a mutual fund and the fund got a 7% return for the year, you would earn $ 700 and your investment would be worth $ 10,700. If you got an average return of 7% the following year, then your investment would be worth $ 11,449.
Over the years, that money can really add up: if you kept that money in a retirement account for 30 years and got that average 7% return, for example, your $ 10,000 would rise to over $ 76,000.
In reality, investment returns will vary from year to year and even from day to day. In the short term, riskier investments such as stocks or mutual funds can actually lose value. But over the long term, history shows that a diversified growth portfolio can earn an average of 6-7% per year. Investment returns are usually shown at an annual rate of return.
Funding can help you reach your long-term savings and investment goals, especially if you have the time to let it work its magic over the years or decades. You can earn a lot more than what you started with.
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Complete with additional contributions
As impressive as the compound interest can be, progress towards savings goals also depends on the regularity of contributions.
Let’s go back to the example above. By depositing an additional $ 100 each month into your savings account, you would end up with $ 23,677 after 10 years, when compounded daily. Interest would be $ 1,677 on deposits totaling $ 22,000.