Understanding Compound Interest
Compound interest is interest calculated on both the original principal and the interest that has already accumulated. As interest is added to the balance, later interest calculations are based on a larger amount. This can cause savings and investments to grow faster over time than they would with simple interest.
How to Use the Compound Interest Calculator
Enter the starting principal, annual interest rate, and length of time in years and months. Then choose how often the interest is compounded.
You can also include an optional recurring contribution and choose whether it is added monthly or annually. The contribution timing setting determines whether each contribution is added at the beginning or end of its contribution period.
The optional calculation start date is used only to estimate the ending date and label the year-by-year growth table. It does not change the amount of interest calculated.
What Does Compounding Frequency Mean?
Compounding frequency describes how often earned interest is added to the balance. This calculator includes daily, monthly, quarterly, semiannual, and annual compounding.
When the same principal, annual interest rate, and time period are used, more frequent compounding generally produces a slightly higher ending balance. The difference may be small over a short period but can become more noticeable over many years.
How Recurring Contributions Are Calculated
Recurring contributions are added throughout the selected time period rather than being added as one lump sum at the end.
With end-of-period timing, a contribution is added after that contribution period’s growth. With beginning-of-period timing, it is added before the period’s growth and receives interest for one additional contribution period.
For annual end-of-period contributions, a contribution is added only after each completed year. An additional annual contribution is not added for an incomplete final year.
Understanding the Results
The estimated ending balance includes the starting principal, all recurring contributions, and the interest earned.
The growth breakdown separates the result into:
Starting principal
Total recurring contributions
Total amount contributed
Total interest earned
Estimated ending balance
The year-by-year table shows the starting balance, contributions, interest, and ending balance for each year. If the selected time includes additional months, the table also includes a final partial-year row.
Small one-cent differences may occasionally appear when separately displayed yearly amounts are added together. This happens because each displayed amount is rounded to cents while the calculator retains greater precision internally.
Effective Annual Yield
The effective annual yield shows the annual rate after accounting for the selected compounding frequency. It may be slightly higher than the stated annual interest rate when interest is compounded more than once per year.
For example, a 6% annual rate compounded monthly has an effective annual yield of approximately 6.168%.
Compound Interest Versus Simple Interest
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal and previously accumulated interest.
The calculator includes a comparison showing how the original starting principal would grow with simple interest and compound interest. Recurring contributions are excluded from this comparison so the effect of compounding can be seen more clearly.
Important Considerations
This calculator assumes a fixed interest rate and regular contributions throughout the selected time period. Actual savings, investment, or account balances may differ because of taxes, fees, changing rates, contribution dates, withdrawal activity, institution-specific compounding methods, and rounding practices.
Use the results as an estimate and review the terms of the actual account or investment before making financial decisions.