Compound Interest Calculator

Key terms for the compound interest calculator

Understanding how compound interest works will help you make better financial decisions, but the financial terminology can be confusing for some people. Here are some essential terms you need to understand when using the compound interest calculator:

Investment amount

The investment amount is the money you initially invested. It’s also sometimes called the principal.

Interest rate

The interest rate is the interest you’ll earn on your investment. The bank determines the interest rate, though it’s loosely tied to the federal funds rate.

Years

This refers to the number of years you plan to invest your money.

Compound interest

This is the interest you earn on the original investment and any interest you accumulated.

Yearly APY

The yearly APY is the annual percentage yield you’ll receive if the interest is compounded annually.

Quarterly APY

The quarterly APY is the annual percentage yield you’ll receive if the interest is compounded quarterly.

Monthly APY

The monthly APY is the annual percentage yield you’ll receive if the interest is compounded monthly.

Daily APY

This is the annual percentage yield you’ll receive if the interest is compounded daily.

What is compound interest?

Compound interest means you earn interest on the original amount you invested and any interest accumulated. Because you’re earning interest on your interest, your savings will grow faster over time. [Read related article: Financial Tracking 101: Best Implementation Practices and Best Tools]

How does compounding interest affect your returns?

If you open a savings account that earns simple interest, you’ll earn interest only on the principal. Because compound interest includes any interest accumulated, your investment returns will be higher over the long run.

And the more frequently your interest compounds, the more interest you’ll earn. The compounding period is how often your interest is added to the account. Interest can be compounded annually, semiannually, quarterly, monthly or daily.

For example, let’s say you invested $1,000 in a savings account earning 5% interest that compounds annually. The first year, you’ll earn $1,050, and after five years, you’ll have $1,276.28. If the interest is compounded semiannually, you’ll have $1,280.08 after five years. And if it is compounded quarterly, you’ll earn $1,282.04 over that period.