Contents

- 1 How to Use the Compound Interest Calculator
- 2 Compound Interest Calculator Results Explained
- 3 What Is Compound Interest, and How Do You Calculate It?
- 4 What Is the Difference Between Simple and Compound Interest?
- 5 How Does Compound Interest Work With Investments?
- 6 How Can a Compound Interest Calculator Help Me?

Find out how much money you can earn with compound interest

## How to Use the Compound Interest Calculator

Here’s what you’ll need to enter in:

**Initial investment**: This is how big a starting deposit you’re making.**Contribution amount**: If you’ll be making additional deposits, how much will you add, and how frequently? Not all investments require additional deposits, but many allow it.**Interest rate**: This is the return on your investment. Then select how frequently the interest compounds. This is how often interest will be calculated on your deposit. This can vary, and might be daily, monthly, annually, or for some other time period.**Length of investment**: This is how long you’ll leave your investment in the account before you make a withdrawal.

## Compound Interest Calculator Results Explained

Here’s what the results mean:

**Total future balance**: This is how much you have in your account in total. It’s a combination of your own contributions, plus whatever interest you’ve earned.**Total interest**: This is how much total interest you’ve earned. In other words, this is the dollar amount of the return on your investment.**Total contributions**: This is how much you’ve personally contributed, both from the start and over time (if you made additional deposits). In other words, how much you yourself have put in and saved up.

## What Is Compound Interest, and How Do You Calculate It?

Compound interest is a way of calculating interest based on your present balance. This includes all of the interest you’ve earned previously at set intervals called the *compounding frequency *(hence the name, “compound interest”).

Because your returns get larger and larger over time, your balance also increases faster with compound interest than it does with other methods. At some point, your returns will be even larger than what you added to the account. This is the ultimate goal with retirement accounts—you save so much that you can live indefinitely off the earnings of your account, rather than drawing down the amount of money that you've saved.

### Compound Interest Formula

Here is how compound interest is calculated for investments in which you only make one deposit (such as a certificate of deposit, or CD):

*A = P (1 + r/n)nt*

*A*is the total amount of money you have at the end*P*is your initial investment amount*r*is your interest rate, expressed as a decimal*n*is how many times your interest is compounded each year*t*is how many years your money is invested

For example, let’s say you deposit $1,000 into a CD at an interest rate of 2.5% APY and let it sit for five years, compounded monthly. Here’s how you would plug that into your calculator:

1000 * (1 + (0.025 / 12)) ^ (12 * 5) = $1,133

After five years, you’d have earned $133 in interest.

### Compounding Frequency

The compounding frequency has a big effect on how fast you earn interest, too. The more often your interest is compounded, the faster it adds up.

For example, consider two investments that pay a 5% interest rate, but one is compounded monthly and the other is compounded annually. You’ll earn more interest with the investment that compounds monthly because that’s 12 chances for your balance to increase throughout the year, rather than once at the end.

## What Is the Difference Between Simple and Compound Interest?

With simple interest, your interest earnings are only calculated based on your initial balance. Your balance will still grow, but it’ll increase at a slower rate because those extra interest earnings aren’t taken into account when calculating how much interest you’re owed.

## How Does Compound Interest Work With Investments?

Compound interest is most often used with investments. Rather than earning money based solely on what you’ve put in (your principal, in other words), you can earn money from your previous earnings also.

This allows your balance to grow much faster, and it comes in handy, especially for long-term investments like retirement accounts. In fact, if you start saving for retirement while you’re young, by the time you retire, your retirement savings could even be made up mostly of market returns, or earnings, rather than what you’ve personally set aside.

This is why it’s so important to start saving while you’re young. Rather than having to work yourself to earn those dollars, you can set up your dollars to start working for you over the years. That way, you won’t have to work as hard or as long.

### What Types of Investments Benefit From Compound Interest?

Most types of investments use compound interest. For example, interest-bearing checking accounts, savings accounts, and CDs (or share certificates, at credit unions) all commonly use compound interest when calculating how much they owe you. It’s still worth checking the fine print, however, because you don’t want to get trapped in an investment that gives you less than you thought you were earning.

## How Can a Compound Interest Calculator Help Me?

The biggest benefit of using a compound interest calculator is being able to tell exactly how much your money will grow in real, tangible dollars. After all, it’s easy enough to understand that a higher rate is better—but what does that rate actually *mean* over time?

The compound interest calculator can tell you exactly how much money you’ll have in the future. You can use that number to see whether a particular investment is really worth your effort, and to plan for how you might eventually use that money.

For example, if a particular investment will only reward you with an extra $1.50 but takes an hour of your time to set up, is it really worth it? Or, if you set aside an extra $100 toward your IRA from each paycheck, how many extra dollars would that grow into by the time you retire? You can use that number as motivation to save even more.