# Compound Interest Calculator (2023)

Use this compound interest calculator to estimate how your investments and savings will grow over time with compounding interest.

## What is Compound Interest?

Compound interest refers to the interest you earn on interest. It assumes the interest earned on your savings or investment account is re-invested and also earns interest, growing your account faster over time.

For example, if you put \$5,000 in a savings account that earns 2% interest and it is compounded once a year. At the end of the first year, you will have earned \$100 in interest.

In year 2, your total interest will be \$202, and in year 3, your total interest will be \$306.04.

Compare this to simple interest calculations for the same principal amount and interest rate and you get:

• Year 1: \$100 interest
• Year 2: \$200 total interest
• Year 3: \$300 total interest

For the compound interest calculation, you earn an extra \$2 and \$6.04 in years 2 and 3 respectively because interest is also earned on the interest earned on the principal.

If the compounding period becomes daily or monthly and/or you make regular contributions, you will see your savings grow a lot faster through the magic of compounding.

Compound interest is calculated using this formula:

A = P (1 + r/n)nt

Where A = the future value of your savings, P = your principal investment, r = interest rate (expressed as a decimal), n = number of compounding periods in each year, and t = time in years your money is invested for.

This formula is sometimes expressed differently using other symbols, but the basic formula is the same.

The easiest way to determine how much you can expect to earn is by using the calculator on this page. This is an annual, monthly, or daily compound interest calculator, so you can change the calculation accordingly.

Simply enter your deposit amount, the interest rate, how long you plan to save for, and whether interest is compounded annually, monthly, or daily.

You can then instantly find out how much you will earn.

## Daily vs Monthly Compounding Interest

Compounding interest is usually calculated either daily or monthly.

This does make a difference, but the size of the difference depends on the APY and the length of time you save.

### Monthly Compounding

With monthly compounding, interest is calculated and added to the principal every month instead of waiting until the end of the year.

If you invest \$10,000 with a 3% annual compound interest, you will get \$300 at the end of the year, giving you a total of \$1,300.

With monthly compounding, \$25 would be added at the end of the first month.

The following month, you would accrue interest on \$1,025, equal to \$25.06, a 6-cent increase on the previous month.

Over 12 months, you would earn \$304.16 in interest – \$4.16 more than if interest was added annually.

### Daily Compounding

Daily compounding provides more interest than monthly, but the difference is usually small.

Using the same figures as above (\$10,000 saving with a 3% interest rate), you would have earned \$0.82 in interest after the first day.

This may not be added immediately and instead might be added at the end of the month.

After one year, you would have earned \$304.53, slightly more than if the interest was compounded monthly.

## Compound Interest vs Simple Interest

Simple interest is where interest accumulates on your contributions, also called principal, but not on the interest you earn.

If you save \$1,000 in an account with simple interest and earn 4% interest, that would be \$40 at the end of the year.

You now have \$1,040 in your account. But if you don’t contribute any more savings, you will earn the same amount the following year, giving you \$1,080. Clearly, you will earn less compared to compound interest.

You may get simple interest rates with some types of loans. This is better for you because interest only stockpiles on the amount you borrow instead of the interest you accrue.

## Where to Invest for Compound Interest

There are several ways to invest to earn compound interest. For example, most bank accounts accrue compound interest. But there are other investments:

• Stocks and bonds
• ETFs
• Mutual funds
• High-Interest Savings Accounts (HISAs)
• Real Estate Assets

See our guide to the best compound interest investments in Canada for more information, and use a compound interest calculator in Canada to work out how much you can earn.

## Pros and Cons of Compound Interest

### Pros:

• Excellent long-term savings possibilities when you save over many years.
• The snowball effect can be very powerful over time.

### Cons:

• It takes time to see the major benefits of compound interest.
• Compound interest charged on loans can be expensive.

You can also check out our RRSP investment calculator and car loan payment calculator.

Disclaimer: Calculation results are approximations and for informational and educational purposes only.

## FAQs

What is the rule of 72?

Use the rule of 72 to get an idea of how long it will take for your savings to double. If you are earning 5% annual interest, divide 72 by 5. This gives you 14.4 years, which is roughly how long it will take to double your investment.

What is \$5,000 invested for 10 years at 10 percent compounded annually?

This would earn \$7,968.71 in interest, leading to a total of \$12,968.71.

Who benefits from compound interest?

People who save over a long period can benefit from compound interest.

Can compound interest work against you?

Yes, when compound interest is charged on money you borrow.

What is the rule of 69?

The rule of 69 is another way to determine how long an investment will take to double with compounded interest. Divide 69 by the interest rate, then add 0.35 to the result.

What is the rule of 70?

The rule of 70 is also used to work out how long an investment will take to double. Work this out by dividing 70 by the annual rate of return.

What is the compound annual growth rate (CAGR)?

GACR essentially shows you what an investment will yield annually on a compounded basis.

What is the time value of money?

This is a financial principle that states that the value of a dollar right now is worth more than its value in the future.