Use the compound interest calculator below to see how fast your money grows with compound interest vs. simple interest.
Savings rates are higher than they’ve been in 15 years. Here are our top picks for those who want to earn the highest interest on their savings.
Why Is Compound Interest Better?
Simple interest is calculated on the initial sum of money deposited. If you deposit $1,000 in an account with a 3% annual simple interest rate, you’ll earn $30 in interest each year.
Compound interest is more powerful, as it’s calculated on the principal amount plus accumulated interest. If you deposit the same $1,000 in an account with a 3% annual compound interest rate, your interest in the first year is the same $30, but in the second year, you earn interest on $1,030, not just the original $1,000, leading to more interest accrued over time.
How to Use the Compound Interest Calculator
Follow these step-by-step instructions to use this calculator:
There are four input boxes in the compound interest calculator. Enter your information and hit Tab to jump to the following field.
1. Enter the Amount of Your Initial Deposit
Enter the amount you have available to save at the beginning. Don’t bother with dollar signs or commas – the calculator will take care of those automatically.
2. Enter the Number of Years You Plan to Save
Enter the years you will keep that money on deposit in your account. If you’re unsure, try using 1 or 2 years and then a longer period to see the difference.
3. Enter Your Estimated Rate of Return
Enter the interest rate on your current bank account or one you are considering. Once you enter a deposit amount, the calculator displays featured bank offers. You can click on one of these so the calculator will automatically show how their interest rate will grow your money, or you can enter a rate yourself.
4. Enter How Often the Interest Will be Compounded
Select a compounding frequency from the menu: Daily, Monthly, Semi-Annually, or Annually. Note that if you enter an APY rather than a simple interest rate, choose “Annually” because APY already accounts for the compounding frequency.
5. Click “Calculate” and Get Your Results
When you click the Calculate button, your results will appear immediately below. The amount shown is how much money you will have saved at the end of the period you selected. However, this does not consider the effect of any fees on the performance. Be sure to check the fee schedule carefully before opening an account.
What Is Compound Interest?
When an account earns interest and that interest is kept in the account, the interest earned previously begins to earn interest itself. Here’s a simple example:
- $100 earns 10% interest. That comes to $10 in interest, so the account is now worth $110.
- In the next period, that $110 earns 10% interest. That comes to $11 in interest, so the account is now worth $121.
Note that even though the interest rate remained the same, the account earned more in the second period. That’s because it earned interest on both the original investment and the interest earned in the initial period.
This process of earning interest on interest is known as compounding. It makes a big difference in how investments grow over time, and the longer you stay invested, the more compounding helps you.
Because of compounding, four factors determine how much interest your savings will earn:
- Amount invested
- Interest rate
- Compounding frequency
- Length of time invested
Compounding frequency refers to how often the bank credits interest to your account so you can start earning additional interest on the interest already earned.
If an account is compounded daily, it means that if you earn interest one day, that interest starts earning interest the very next day; this is daily compound interest.
If an account is compounded monthly or annually, it will take a little longer for the interest you’ve already earned to start earning additional interest.
Calculating Future Value of Investments
The future value of your savings or investment is influenced by several factors: the initial deposit (principal), the interest rate, the compounding frequency, and the duration of the investment.
For instance, if you invest $2,000 at a 3% annual interest rate for 2 years, the total interest you earn will depend on whether the interest is compounded monthly, quarterly, or annually. The more frequently the interest is compounded, the more you earn.
To illustrate, consider a $1,000 deposit in an account with a 4% annual interest rate compounded yearly. After 2 years, this investment would grow to approximately $1,081.60. However, if the interest were compounded monthly, the total after 2 years would be slightly higher.
Understanding these dynamics helps in making more informed decisions about where and how to invest your money for maximum growth.
Interest Rate vs. APY
Because of compounding, the interest you earn can be more than the interest rate times the amount invested.
Applying the interest rate to the amount invested assumes that no compounding takes place during the year. However, if the account compounds interest more frequently than annually, it should yield additional interest due to the effect of compounding.
When the amount of interest produced each year after accounting for compounding is measured as a percentage of the amount invested, it is referred to as the annual percentage yield or APY.
How often an account compounds interest makes a subtle difference, but every little bit matters over time. That’s why you should always compare APYs rather than simple interest rates because APY includes the impact of how frequently the account compounds interest.
What to Watch Out for Other Factors Besides Interest and APY
APY is essential when shopping for deposit accounts, but it is not the only factor you should consider.
Here are three other factors to consider when choosing a deposit account:
Federal Deposit Insurance
Ensure the account you’re considering is covered by federally-backed insurance – either through an FDIC-member bank or an NCUA-member credit union. Not all cash management products are eligible for this kind of federal insurance.
Some interest rates are not as reasonable as they look because you have to pay a regular fee to get that interest rate. Be sure to check on how much interest you earn, which will be offset by fees. In some cases, fees can wipe out all the interest you earn.
Early Withdrawal Penalties
CDs generally offer higher interest rates than savings and money market accounts. Just be sure you are prepared to leave your money in the CD for the entire term of that CD, or you will probably have to pay an early withdrawal penalty.
Some banks apply different interest rates to varying sizes of deposits. One promotional trick is offering a great interest rate but only for a minimal amount. With that kind of rate tier, unless you are only making a small deposit, the rate you earn may not be as good as the rate that the bank is advertising.
Choosing the Right Type of Account to Earn Interest
Before comparing APYs and fees on deposit accounts, you must decide what type of account you want.
Money market accounts and savings accounts have very similar characteristics. Each one produces interest and allows you to withdraw your money at any time (though a few days’ notice might sometimes be required).
So, you can use money market and savings accounts in the same way. You can compare both types of accounts and choose the best APY with no fees and a minimum balance requirement you can quickly meet.
CDs are different. They typically require you to lock in your money for a specific amount of time, in return for which they usually pay higher rates than money market or savings accounts.
So, a critical factor in your decision is when you expect to need the money. If you’re confident you won’t need to withdraw the money for several months or even a few years, you can commit to a CD to earn a higher interest rate.
How to Find the Best Savings and Money Market Rates
Since savings and money market accounts can be used in much the same way as one another, you can consider both types of accounts and choose according to factors such as the following.
Will Your Account Be Federally Insured?
This means ensuring the money is deposited in an eligible account at an FDIC-insured bank or an NCUA-insured credit union. Remember, this insurance is limited to $250,000 of your deposits at any financial institution.
Can You Meet the Minimum Account Requirements?
Some accounts have different requirements for how much you need to start an account and how much of a balance you must keep. Focus your attention on accounts with requirements your deposit will be able to meet.
How Competitive Is the APY?
Compare money market and savings account rates on the MoneyRates rates page, or start by looking at a few selected accounts at the end of this section.
Will the APY Apply to Your Full Account?
See if the account has different rate tiers that will affect how much your money will earn.
Is There a Monthly Maintenance Fee?
These fees diminish or can even wipe out the interest you earn, so avoid them when choosing a savings or money market account.
How to Find the Best CD Rates
If you decide you are willing to commit to a CD to earn more interest, here are some things that should factor into your search for the best CD rates:
Will Your Account Be Federally Insured?
Like savings and money market accounts, CDs are eligible for deposit insurance. This only applies if your money is deposited in an eligible account at an FDIC-insured bank or an NCUA-insured credit union. Again, this insurance is limited to $250,000 of your deposits at any financial institution.
Can You Meet the Deposit Requirement?
Some CD offers only apply to specific account sizes, so focus your search on offers that apply to the amount you want to deposit.
How Competitive Is the APY?
The interest rate on a CD is typically locked in for the entire term of the CD. That makes rate shopping especially important when choosing a CD. You can find CD offers on the MoneyRates CD rate page or start by looking at a few selected accounts in the table at the end of this article.
What Is the Early Withdrawal Fee?
You shouldn’t choose a CD if you’ll likely need to take any money out before the CD’s term ends. Just in case, though, if the APYs of two CDs are pretty similar, you can compare early withdrawal fees. Seeing which has the lower early withdrawal fee could be the tiebreaker.