Savings Interest Calculator
Calculate how your savings will grow over time with compound interest.
Savings Growth Results
Final Balance:
Total Deposits:
Total Interest Earned:
After-Tax Interest:
Effective Annual Percentage Yield (APY):
Breakdown by Year
| Year | Starting Balance | Deposits | Interest | Ending Balance |
|---|
Understanding Compound Interest
Compound interest is often described as "interest on interest" and is one of the most powerful forces in finance. Unlike simple interest, which is calculated only on the initial principal, compound interest is calculated on both the initial principal and the accumulated interest from previous periods.
The Power of Compound Interest
Albert Einstein reportedly called compound interest "the eighth wonder of the world," adding that "he who understands it, earns it; he who doesn't, pays it." This powerful concept explains why starting to save early is so beneficial for long-term wealth building.
The Compound Interest Formula
The formula for calculating compound interest with regular contributions is:
A = P(1 + r/n)^(nt) + PMT × [(1 + r/n)^(nt) - 1] / (r/n)
Where:
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (in decimal form)
- n = Number of times interest is compounded per year
- t = Time in years
- PMT = Regular payment amount
Compounding Frequency
The frequency at which interest is calculated and added to your balance can significantly impact your returns over time. Common compounding periods include:
- Annually: Interest is calculated once per year
- Semi-annually: Interest is calculated twice per year
- Quarterly: Interest is calculated four times per year
- Monthly: Interest is calculated each month (most common for savings accounts)
- Daily: Interest is calculated every day
More frequent compounding leads to greater returns, though the difference becomes less significant as the frequency increases.
The Rule of 72
A quick way to estimate how long it will take for your money to double is the "Rule of 72". Simply divide 72 by your annual interest rate (as a whole number). For example, at 6% interest, your money would double in approximately 72 ÷ 6 = 12 years.
Factors Affecting Your Savings Growth
- Initial Deposit: Starting with a larger amount gives compound interest more to work with
- Regular Contributions: Adding money regularly accelerates growth significantly
- Interest Rate: Even small differences in rates can lead to huge differences over time
- Time Horizon: Longer investment periods allow compound interest to work its magic
- Compounding Frequency: More frequent compounding leads to faster growth
- Taxes: Taxes on interest can reduce effective returns (tax-advantaged accounts can help)
Frequently Asked Questions
What's the difference between interest rate and APY?
The interest rate is the basic rate at which your money grows, while the Annual Percentage Yield (APY) accounts for compounding. For example, a 5% interest rate compounded monthly would result in an APY of about 5.12%. APY gives you a more accurate picture of your actual returns and is useful for comparing different savings products.
How does inflation affect my savings?
Inflation erodes the purchasing power of your money over time. If your savings earn 3% interest but inflation is running at 2%, your real return (the growth in purchasing power) is only about 1%. For long-term goals, it's important to aim for returns that exceed the inflation rate to ensure your money maintains or increases its real value.
Should I focus on a high initial deposit or regular contributions?
Both are valuable, but regular contributions are often more practical and powerful for most people. Consistently saving a portion of your income creates a disciplined saving habit and takes advantage of dollar-cost averaging if you're investing. However, if you have a windfall sum, investing it immediately rather than gradually typically yields better results, assuming you have a long time horizon.
How do taxes impact my savings growth?
In most countries, interest earned on savings is taxable as income, which reduces your effective return. The impact depends on your tax bracket and the type of account. Tax-advantaged accounts like IRAs, 401(k)s, or their equivalents in other countries can help shelter your interest from taxes, either by deferring taxes until withdrawal or by providing tax-free growth.