What is compound interest?
Compound interest is a powerful financial concept where you earn interest not just on your
initial principal amount but also on the interest that has been added over previous periods.
This means that your investment grows at an increasing rate as the interest compounds. Over
time, this effect significantly boosts the growth of your savings, allowing your money to work
harder and grow faster than with simple interest. The longer you leave your money to compound,
the more pronounced the growth will be, making compound interest a key factor in wealth
accumulation and financial planning.
Interest Calculator Example
Suppose you want to invest $5,000 into a high-yield savings account with a 10% annual yield,
compounded annually. You don't plan to add additional funds after your initial deposit. Here’s
how you would use the calculator above:
- Initial deposit: $5,000.
-
Contribution amount: $0. (Since you won’t be making additional
contributions, enter "$0" in the field.)
-
Years of growth: 5. (You can start by entering "1", then increase this to
see how much you can earn over more years.)
- Estimated rate of return: 10%.
- Compound frequency: Annually.
After five years, you’ll have earned $3,052.55 in interest, for a total balance of $8,052.55.
If you leave your money in that account for another five years, you'll earn $4,937.72 in
interest in those years, resulting in a total of $7,990.27 in interest over ten years, giving
you a final balance of $12,990.27.
Remember, this is just an example. Savings account annual percentage yields (APYs) are subject
to change at any time. For longer-term savings, there may be better places to store your money,
including Roth or traditional IRAs and CDs.