Compounding Comparison Savings Calculator
Have you been making monthly deposits into an investment account? If you have, this calculator can help you determine the future value of accounts with four different compounding intervals: daily, monthly, quarterly, and annually.
First enter you initial investment, the monthly addition you’ve been making to your account, the annual interest rate, and the number of years you plan to let your investment grow.
Click on CALCULATE, and you’ll see a comparison of the four different compounding intervals. For each interval, you’ll get numbers for total deposit amount, future value, and total interest earnings.
A Guide to Interest Compounding Frequency
You have $10,000 to invest. If your investment is earning simple interest at 5 percent quarterly, you will have earned $10,500. But if you have compound interest, you're actually earning interest on your interest. With a compounded interest rate of 5 percent, you are pleasantly surprised to see that you have actually earned $11,025.
That is the beauty of compound interest -- if you are an investor or a lender. However, if you are the one who has to pay the compounded amount, you may not feel as good about the option.
What You Need to Know About Compound Interest
The textbook definition of compound interest is interest paid on principal and accumulated interest. Compound interest on an investment or savings account means your money never stops making money, even if you never add another nickel to the pot.
Here are some ways people take advantage of compound interest:
- Start investments early. With any savings or investment plan, the earlier you start, the more you can make. This is especially true with compound interest, where you can earn even more the longer your investment sits.
- Add money to the pot. With any account that you can add cash to, such as a savings account, you can earn more money by adding money. Instead of 5 percent interest compounded on $10,000 for the next five years, you can add $100 every month and watch your money grow even faster. However, with investments, keep in mind that though the numbers are there, you haven't actually made any money until you sell the investment.
- Keep an eye on the interest rate. The amount of the interest rate will also have an impact on how much you make or save. A 5 percent interest rate is going to earn more money than 1 percent.
If you want to estimate how fast your money will grow, experts say to use the Rule of 72. The Rule can tell you about how long it will take you to double your investment and how it can grow over time. All you need to do is divide the number 72 by your interest rate.
Example: If your interest rate is 8 percent, divide 72 by 8. The answer tells you will double your investment in nine years. If you started with $10,000, you could expect $20,000 in nine years, $40,000 in 18 years, $80,000 in 27 years and so on.
Your money will continue to grow, though the rate at which it grows will depend on how often the interest compounds.
What You Need to Know About How Frequently Interest Compounds
There is no set rate for how often your interest rate will compound. It can vary by state, lending institution, investment firm, etc. Interest can be compounded over just about any length of time, including daily weekly, monthly, quarterly, or annually.
The best way to determine whether your account has compound interest and how often it is calculated is to speak with your banking institution about your options. Various saving options will have different terms for compounding frequency including:
- Certificates of Deposit - A Certificate of Deposit (CD) is an agreement to keep your money in the bank for a certain amount of time. Interest rates are typically higher on CDs.
- Savings accounts - You can maintain a savings account through a bank or credit union. Interest rates are determined by the banking institution.
- Bonds - Companies sell bonds to raise money to run their business. When you buy a bond, you are loaning the company money and they agree to pay you back with interest.
Try this interest calculator to see how your money can grow.
When Compound Interest Hurts
If you are a borrower who is getting hit with compound interest, you want the interest to accrue as slowly as possible.
For instance, credit cards or other open-ended accounts frequently accrue interest that put the borrower deeper into debt. One way to reduce this is by paying more than the minimum payment due every month. As you lower your balance, you lower the amount of interest earned on the principal.
Another example is an auto or home loan. Lenders have often calculated interest into the loan and break your payments up according to that figure, not the amount you initially borrowed. The best way to combat this is to pay a few dollars more than what you owe each month to help get your principal balance down.
With the proper research, compound interest offers a great opportunity to make money. However, you should make sure you are an investor or lender, not a borrower.