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  3. Compound Interest Calculator

compound interest calculator

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How to use Credit Karma’s compound interest calculator

Compound interest can help you increase your savings over time. Our compound interest calculator shows how quickly your money may grow based on your account’s compounding schedule. The more often the interest is compounded, the faster your balance will increase.

But keep in mind that this calculator only provides an estimate based on the information you enter. Certain variables, such as the account type, interest rate and fees, may affect your actual earnings and the time it takes to reach your savings goal.

To get started, you’ll need to provide the following information:

How much is your initial deposit?

Enter the amount of money you plan to use to open your account. The larger your initial investment, the sooner you may be able to reach your financial goal.

Estimated interest rate

Include the interest rate you expect your account to earn. Be sure to enter the interest rate rather than the annual percentage yield — the APY will change depending on the compounding interval you choose.

Your preferred investment term

Enter the number of years you plan to save. The more time your money has to compound, the more interest it’ll earn.

How often is interest compounded?

Compounding intervals can vary by account type and financial institution. For the purposes of our compound interest calculator, you can choose a compounding frequency of daily, monthly, quarterly or annually. The more frequently the interest on the account compounds, the faster your money grows.

Additional monthly contributions

Lastly, enter additional monthly deposits you plan to make. This final field is optional, but it’s important. When you make additional contributions to your account, you’ll earn interest on a larger sum of money, which may help you reach your savings goals more quickly.

How to use the compound interest calculator to plan your goals

The compound interest calculator can help you see how different investment amounts, interest rates, investing timelines and compounding frequency may affect your results. Just keep in mind that this calculator uses a consistent interest rate. Many investments may have a variable rate that this calculator won’t account for.

Using the calculator to understand how these factors can affect your total principal investment, interest earned and the future value of your investment can help compare different investment options to choose an investment strategy that best meets your financial goals.

What is principal invested?

The principal you invest isn’t just your initial deposit. It also includes additional contributions you make to your account. Making additional monthly contributions increases the total principal you invest, and you can earn interest on a larger sum of money.

Total interest earned

This is the total amount of interest you earn throughout the lifetime of your investment. Accounts with higher interest rates and more compounding periods earn more interest than accounts with lower rates and fewer compounding periods.

Future value of your investment

The future value of the investment is an estimate of how much your account is worth at the end of your investment timeline. Larger sums of money, higher interest rates and more frequent compounding can contribute to a larger account balance. But the effect of compounding interest is most powerful when you let your money grow for an extended period of time.

Investment examples

Here are two examples that demonstrate the power of compound interest.

Scenario 1

  • Initial deposit: $1,000
  • Contributions: $50 each month
  • Interest: 1% compounding monthly

At the end of 10 years, you’ll have invested $7,000, earned $412.62 in total interest and the value of your account will be $7,412.62.

Scenario 2

  • Initial deposit: $5,000
  • Contributions: None
  • Interest: 5% compounding daily

At the end of 10 years, you’ll have invested $5,000, earned an estimated $3,243.32 in interest and have an account worth an estimated  $8,243.32.

Though you invested more money in the first example, the account in the second example is worth more because of the larger initial deposit, higher interest rate and higher compounding frequency.

How compound interest rates work

The magic of compound interest is that you don’t just earn interest on the principal amount you invest. Instead, the interest your account earns gets reinvested every time it compounds — and it earns interest too, so your account grows exponentially over time. Essentially, you’re earning interest on your principal investment, plus any interest you’ve accumulated in the account. The longer you save and the more times the account compounds, the more your money can grow.

Let’s take a closer look at understanding a little more about how compound interest works.

Compound interest vs. simple interest

A simple interest account only earns interest on the amount you deposit. With a compound interest account, you earn interest on the principal plus the interest that’s already accrued. In other words, the interest earns interest too.

How compound interest grows over time

Compound interest may not seem to make that much of a difference at the beginning. But over time as you earn interest on a larger sum of money, your balance will increase exponentially.

For example, let’s say you invest $10,000 in a simple-interest account that earns 5%. You’ll earn an estimated $500 in interest and your account will be worth $10,500 after a year.

Now, let’s assume the account earns 5% interest and is compounded daily. You’ll earn an estimated $512.67 in interest and your account will be worth an estimated $10,512.67 after a year. That’s a difference of $12.67.

But remember the magic of compound interest is in the long game. So if you invest for 30 years, the simple interest account would earn an estimated $15,000 in interest — but the compound interest account would earn an estimated $34,812.29 in interest. That’s a major difference of $19,812.29.

How compound interest is calculated

Compound interest is calculated as a percentage of your account balance, which includes the amount you invest plus interest that’s been credited to your account. You can use our compound interest calculator to do the math for you, but if you’re curious how it breaks down, here’s the formula:

A = P(1+R/N)^NT

  • A = The future value of your account after n years
  • P = The principal or amount you contribute to the account
  • R = The annual interest rate, expressed as a decimal
  • N = The number of times interest compounds in a year
  • T = The number of years you plan to invest your money

Simply plug in the numbers for each variable. The difference between the principal and the future value of your account is the amount of interest you earned.

The rule of 72

The rule of 72 can help you estimate how long it’ll take for your investment to double at a specific interest rate. It’s not as accurate as using the compound interest formula, but it’s an easy way to get a quick estimate. Simply divide 72 by the account’s annual rate of return.

For example, if the interest rate on your account is 7%, it would take approximately 10 years for your account balance to double: 72/7 is 10.2.

What to consider when comparing compound interest savings accounts

There are a few different types of compound interest accounts: traditional savings accounts, high-yield savings accounts, money market accounts and certificates of deposit, or CDs.

Interest rates, minimum opening deposit requirements and compounding schedules may vary by account type and between financial institutions. There may also be restrictions on making additional contributions to or withdrawals from the account — depending on the type you choose.

With so many different options, it’s a good idea to compare the pros and cons of each. Shopping around can help you find one that best fits your savings goals.