Compound Interest Calculator
November 17, 2020
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Here's how to use NerdWallet's compound interest calculator:
- Enter an initial deposit.
- Next, enter a target monthly or annual contribution — say, $100. You can also enter $0.
- With each entry you make, watch the Future Balance amount change automatically. This represents how much your savings and investments can grow over time.
- The calculator considers initial deposit, contributions, time span, rate of return and compound frequency. Plug in different values to see how changes to those figures can affect your future balance.
How compound interest works
Compound interest is simple: It’s the interest you earn on both your original deposit and on the interest that your money earns. Compound interest allows your savings to grow faster over time.
In an account that pays interest, the earnings are typically added to the original principal at the end of every compounding period. That's often daily or monthly. Each time interest is calculated and added to the account, the larger balance results in more interest earned than before. This is what’s meant by compound interest. Note that high-interest savings accounts earn money faster than accounts with lower yields.
For a simple, quick explainer, see What Is Compound Interest?
Compounding investment returns
When you invest in the stock market, you don’t earn a set interest rate. Instead, the return is based on the change in the value of your investment. When the value of your investment goes up, you earn a return.
If you leave your money and the returns you earn invested in the market, those returns are compounded over time in the same way that interest is compounded.
Investment returns will vary year to year and even day to day. In the short term, investments such as stocks or stock mutual funds may actually lose value. But over a long time horizon, history shows that a diversified growth portfolio can return an average of 6% to 7% annually.
Compound interest can help fulfill your long-term savings and investment goals, especially if you let it go to work over several decades.
» Ready to start earning compound interest? Check out NerdWallet's list of best savings accounts..