Compounding and Your Return Calculator
How interest is calculated can greatly affect your savings. The more often interest is compounded, or added to your account, the more you earn. This calculator demonstrates how compounding can affect your savings, and how interest on your interest really adds up!
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
The compound interest calculator helps you work out:
- what money you'll have if you save a regular amount
- how compounding increases your savings interest
- the difference between saving now and saving later
- how to calculate compound interest
Disclaimers
- A model not a prediction. Results are only estimates, the actual amounts may be higher or lower. We cannot predict things that will affect your decision, such as changing interest rates.
- This calculator is not intended to be your sole source of information when making a financial decision. Consider whether to get advice from a licensed financial adviser.
Assumptions
- Initial deposit is made today.
- Regular deposits are made at the end of year, month, fortnight, week, or day (according to the deposit frequency you set).
- Interest is credited either monthly or annually, in line with standard industry practice.
- The delayed start comparison feature will have the same regular deposit frequency.
FAQs - frequently asked questions
Q. How does compound interest work?
A. See compound interest to find out more.
Q. Are the results of the compound interest calculator shown in today's dollars?
A. The results of this calculator are shown in future dollars. No adjustment has been made for inflation.
Q: Why have you changed the calculator?
A: We upgrade our calculators regularly due to technological advances, regulatory changes and customer feedback. Once a calculator has been upgraded, the old version is no longer available.
The sooner you start to save, the more you'll earn with compound interest.
How compound interest works
Compound interest is the interest you get on:
- the money you initially deposited, called the principal
- the interest you've already earned
For example, if you have a savings account, you'll earn interest on your initial savings and on the interest you've already earned. You get interest on your interest.
This is different to simple interest. Simple interest is paid only on the principal at the end of the period. A term deposit usually earns simple interest.
Save more with compound interest
The power of compounding helps you to save more money. The longer you save, the more interest you earn. So start as soon as you can and save regularly. You'll earn a lot more than if you try to catch up later.
For example, if you put $10,000 into a savings account with 3% interest compounded monthly:
- After five years, you'd have $11,616. You'd earn $1,616 in interest.
- After 10 years you'd have $13,494. You'd earn $3,494 in interest.
- After 20 years you'd have $18,208. You'd earn $8,208 in interest.
Compound interest formula
To calculate compound interest, use the formula:
A = P x (1 + r)n
A = ending balance
P = starting balance (or principal)
r = interest rate per period as a decimal (for example, 2% becomes 0.02)
n = the number of time periods
How to calculate compound interest
To calculate how much $2,000 will earn over two years at an interest rate of 5% per year, compounded monthly:
1. Divide the annual interest rate of 5% by 12 (as interest compounds monthly) = 0.0042
2. Calculate the number of time periods (n) in months you'll be earning interest for (2 years x 12 months per year) = 24
3. Use the compound interest formula
A = $2,000 x (1+ 0.0042)24
A = $2,000 x 1.106
A = $2,211.64
Lorenzo and Sophia compare the compounding effect
Lorenzo and Sophia both decide to invest $10,000 at a 5% interest rate for five years. Sophia earns interest monthly, and Lorenzo earns interest at the end of the five-year term.
After five years:
- Sophia has $12,834.
- Lorenzo has $12,500.
Sophia and Lorenzo both started with the same amount. But Sophia gets $334 more interest than Lorenzo because of the compounding effect. Because Sophia is paid interest each month, the following month she earns interest on interest.