Learn more about how the Compound Interest Calculator works
- How to use the Compound Interest calculator
- Compound Interest Formula
- Compound Interest Example Calculation
- Compound Interest Calculator FAQs
How to use the Compound Interest calculator
To use the compound interest calculator, you’ll need to enter some details about your deposit. These are explained below:
- Initial Deposit - This is the starting amount of money you plan to deposit into savings. This will be the base amount the compound interest is calculated on.
- Regular Deposit - This is the amount of money you plan to deposit regularly.
- Deposit Frequency - How often you plan to make regular deposits into your savings account. If you have created a budget plan and put aside a regular amount to deposit into savings, you can select the relative frequency option here.
- Compound Frequency - How often interest is applied to your savings. Depending on the type of savings account you are using, this will be monthly or annually.
- Number of Years - How long you plan to keep your initial deposit and regular deposits untouched in your savings account for.
- Interest Rate - This is the interest rate applied to your savings. Check the details of your savings account with your bank to understand how interest rates may change over time, or whether they are fixed for a set period.
Once you have entered the details about your estimated savings, you can click See My Savings to see how much you will gain through interest each year, including the total balance of your savings over the period.
Compound Interest Formula
The formula for compound interest on a single deposit is: a = d ((1 + ( r / n )) ^ (n * p))
- a - the amount of money you will have at the end of the deposit period
- d - your initial deposit
- r - the annual interest rate expressed as a decimal
- n - the number of compounding periods per year - e.g. monthly = 12
- p - the number of years your money will be in savings and you will accrue interest
Keep in mind that this is a simple formula, and when calculating the compounding interest on an amount which includes a frequent deposit, you’ll need to alter the way you calculate the interest.
This is because your compounding interest will be calculated at the beginning of the deposit period, where interest is added to the initial amount plus any deposits.
You deposit $10,000 for a fixed term and make regular deposits of $1,000 each month. The compounding interest is 5.00% and calculated annually, so for your first year, the amount of interest will only be $500 - where 5 per cent of 10,000 is 500. The total amount at the end of that year in your account will be 10,000 plus interest (500) plus your deposits (12,000), so the total amount will be $22,500.
For the next year, the 5.00% interest will be applied to the starting amount (22,500) so your interest will be $1,125. The total amount at the end of the second year will be the starting amount (22,500) plus the interest (1,125) plus the deposits (12,000), so your total amount at the end of the second year will be $35,625.
Compound Interest Example Calculation
Let’s see how compound interest works in a simple example on a single deposit. We’ll use a $10,000 deposit earning 5% interest compounded monthly. You plan to leave the money untouched for 5 years.
- a = d ((1 + ( r / n )) ^ (n * p))
- a = 10000 * ((1 + (.05 / 12)) ^ (12*5))
- a = 10000 * (1.00416666667) ^ (60)
- a = 10000 * (1.28335867876)
- a = 12,833.59
- Total amount in savings = $12,833.59
- Interest Earned is (a - d). In this example, that would be 12,833.59 - 10,000 = 2,833.59
- Interest Earned = $2,833.59
If you want to quickly calculate the amount of interest you’ll earn on your savings deposit without creating your own spreadsheet with the above calculations, you can use our free compound interest calculator.
Example of compound interest on deposits
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Compound Interest Calculator FAQs
Compound interest is the process of increasing an amount of money at set periods by applying interest to a new, calculated amount each time. Think of compounding interest like a snowball, as you roll it down a hill, it gradually becomes bigger and bigger, with the total mass (amount of money) increasing its size more and more each time.
The easiest way to understand how compound interest works is to look at it as an amount of money plus interest that is calculated on a previous amount of money plus interest. It is a cycle of financial growth where increasing amounts with the same interest rate applied will still continue to yield greater additional earnings each time.
Compound interest is one of the best ways to save money if you are prepared to invest an amount over a significant period of time, and especially if you are able to deposit more money into the savings account regularly.
Compound interest can certainly help you increase the amount earned through savings and investments, however compound interest can also apply to debt. Understanding how compound interest works will allow you to better understand how debt and interest may affect your ability to comfortably repay an amount of debt over time.