Try your calculations both with and without a monthly contribution — say, $5 to $200, depending on what you can afford.
This savings calculator includes an example rate of return. To see the annual percentage yield you can expect, compare rates on NerdWallet for thousands of savings accounts and certificates of deposit.
» Ready to begin? Start saving with some of our favorite savings accounts or IRA providers.
ALSO CONSIDER:Savings Calculator||Emergency Fund Calculator || CD Calculator
A savings account is a place where you can store money securely while earning interest.
A savings account is a place where you can store money securely while earning interest.
Learn More
Member FDIC
SoFi Checking and Savings
APY
4.60%
Min. balance for APY
$0
Learn More
Member FDIC
CIT Bank Platinum Savings
APY
5.05%
Min. balance for APY
$5,000
Learn More
Deposits are FDIC Insured
BMO Alto Online Savings Account
APY
5.10%
Min. balance for APY
$0
What is compound interest?
For savers, the definition of compound interest is basic: It’s the interest you earn on both your original money and on the interest you keep accumulating. Compound interest allows your savings to grow faster over time.
In an account that pays compound interest, such as a standard savings account, the return gets added to the original principal at the end of every compounding period, typically daily or monthly. Each time interest is calculated and added to the account, it results in a larger balance. With the compound interest formula, the account earns more interest in the next compounding period.
For example, if you put $10,000 into a savings account with a 4% annual yield, compounded daily, you’d earn $408 in interest the first year, $425 the second year, an extra $442 the third year and so on. After 10 years of compounding, you would have earned a total of $4,918 in interest.
But remember, that’s just an example. For longer-term savings, there are better places than savings accounts to store your money, including Roth or traditional IRAs and CDs.
Compounding investment returns
When you invest in the stock market, you don’t earn a set interest rate but rather a return 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 are invested in the market, those returns compound over time in the same way that interest is compounded.
If you invested $10,000 in a mutual fund and the fund earned a 6% return for the year, it means you gained $600, and your investment would be worth $10,600. If you got an average 6% return the following year, it means your investment would be worth $11,236.
Over the years, that money can really add up: If you kept that money in a retirement account over 30 years and earned that average 6% return, for example, your $10,000 would grow to more than $57,000.
In reality, investment returns will vary year to year and even day to day. In the short term, riskier 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% annually. Investment returns are typically shown at an annual rate of return.
Compounding can help fulfill your long-term savings and investment goals, especially if you have time to let it work its magic over years or decades. You can earn far more than what you started with.
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Compounding with additional contributions
As impressive as compound interest might be, progress on savings goals also depends on making steady contributions.
Let’s go back to the savings account example above and use the daily compound interest calculator to see the impact of regular contributions. We started with $10,000 and ended up with $4,918 in interest after 10 years in an account with a 4% annual yield. But by depositing an additional $100 each month into your savings account, you’d end up with $29,648 after 10 years, when compounded daily. The interest would be $7,648 on total deposits of $22,000.
Frequently asked questions
How do you calculate compound interest?
To calculate interest without a calculator, use the formula A=P(1+r/n)^nt, where:
A = ending amountP = original balancer = interest rate (as a decimal)n = number of times interest is compounded in a specific timeframet = time frame
What is the compound interest formula, with an example?
Use the formula A=P(1+r/n)^nt. For example, say you deposit $5,000 in a savings account that earns a 3% annual interest rate, and compounds monthly. You’d calculate A = $5,000(1 + 0.03/12)^(12 x 1), and your ending balance would be $5,152. So after a year, you’d have $5,152 in savings.
As an enthusiast well-versed in financial concepts and calculations, let's delve into the information provided in the article and expand on the concepts used:
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Savings Accounts and Interest Rates:
- A savings account is a secure place to store money while earning interest. The article mentions several savings accounts with varying Annual Percentage Yields (APY), such as SoFi Checking and Savings (APY 4.60%), CIT Bank Platinum Savings (APY 5.05%), and BMO Alto Online Savings Account (APY 5.10%).
- These APY figures indicate the annual rate at which the account balance grows, taking into account compound interest.
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Compound Interest:
- Compound interest is a fundamental concept for savers. It refers to earning interest not only on the original deposit but also on the accumulated interest. This allows savings to grow faster over time.
- In the context of savings accounts, interest is typically compounded daily or monthly. The compound interest formula plays a crucial role, as it calculates the interest earned at each compounding period, leading to a larger balance.
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Example of Compound Interest:
- An example is provided: If $10,000 is deposited into a savings account with a 4% annual yield, compounded daily, the interest earned would be $408 in the first year, $425 in the second year, and so on. After 10 years, the total interest earned would be $4,918.
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Alternative Long-Term Savings Options:
- The article suggests that for longer-term savings, there are better options than savings accounts. It mentions Roth or traditional IRAs and CDs as alternatives for storing money.
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Compound Returns in Investments:
- The concept of compounding extends to investment returns. Unlike a set interest rate, returns in the stock market are based on the change in the value of the investment. Returns, when reinvested, compound over time.
- An example is given where a $10,000 investment with a 6% return annually can grow to more than $57,000 over 30 years, emphasizing the power of compounding in investments.
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Compounding with Additional Contributions:
- The article emphasizes that while compound interest is impressive, consistent contributions play a crucial role in achieving savings goals.
- An example is provided using the daily compound interest calculator. By depositing an additional $100 each month into a savings account with a 4% annual yield, the ending balance after 10 years increases to $29,648.
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Compound Interest Calculation Formula:
- The article includes the compound interest formula: (A = P(1 + \frac{r}{n})^{nt}), where A is the ending amount, P is the original balance, r is the interest rate (as a decimal), n is the number of times interest is compounded, and t is the time frame.
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Calculation Example:
- An example is given for the compound interest formula: If you deposit $5,000 in a savings account with a 3% annual interest rate, compounded monthly, the ending balance after one year would be $5,152.
In summary, the article covers fundamental financial concepts such as savings accounts, compound interest, alternative savings options, and the impact of additional contributions on long-term savings goals. The inclusion of formulas and examples enhances the reader's understanding of these concepts.
