What Is Compound Interest?
Compound interest is interest earned on both your original principal and the accumulated interest from prior periods. Unlike simple interest — which only applies to your starting amount — compound interest causes your balance to grow exponentially. The longer money stays invested, the more dramatic the compounding effect becomes.
How Compound Interest Is Calculated
A = P × (1 + r/n)^(n×t)
A = final amount · P = principal · r = annual rate · n = compounding periods/year · t = years
For accounts with regular contributions, each monthly deposit is added and compounds for the remaining time. This calculator simulates period-by-period to give accurate results for any compounding frequency.
Effective APY = (1 + r/n)^n − 1 — this is the true annual return after compounding. A 5% APR compounded daily yields an APY of 5.127%.
Compounding Frequency Comparison
| Frequency | Periods/Year | APY on 5% APR | $10k after 10yr |
|---|---|---|---|
| Annually | 1 | 5.000% | $16,289 |
| Quarterly | 4 | 5.095% | $16,436 |
| Monthly | 12 | 5.116% | $16,470 |
| Daily | 365 | 5.127% | $16,487 |
Frequently Asked Questions
What is compound interest?
Compound interest is interest earned on both your original principal and the interest already accumulated. Unlike simple interest (which only applies to the principal), compound interest causes your balance to grow exponentially over time. The more frequently interest compounds, the faster your money grows.
What is the difference between APR and APY?
APR (Annual Percentage Rate) is the stated annual interest rate without accounting for compounding. APY (Annual Percentage Yield) is the effective annual rate after compounding. APY is always equal to or higher than APR. Banks advertise APY on savings accounts because it shows the true annual return — always compare accounts using APY.
Does compounding frequency really matter?
Yes, but the difference between daily and monthly compounding is relatively small. On $10,000 at 5% for 10 years: monthly compounding yields $16,470, while daily compounding yields $16,487 — a difference of just $17. Frequency matters more with larger balances and longer time horizons. Choosing a higher-rate account is far more impactful than choosing daily vs monthly compounding.
What are HYSA rates in 2026?
High-yield savings accounts (HYSA) at online banks are offering APYs between 4.15% and 5.00% in 2026, compared to the national average of about 0.60%. Top HYSAs compound daily. On $10,000 at 4.5% APY for 5 years, you'd earn approximately $2,462 in interest — vs just $304 at the national average rate.
Is it better to start earlier or invest more?
Starting earlier wins almost every time. A 25-year-old investing $200/month at 7% for 40 years accumulates about $528,000. A 35-year-old investing $400/month (twice as much) for 30 years accumulates about $489,000 — less, despite contributing double. Time in the market beats amount invested per month.
What is the Rule of 72?
The Rule of 72 is a mental math shortcut: divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 6% annual return, your money doubles in roughly 12 years. At 9%, about 8 years. The rule is most accurate for rates between 4% and 12%.
How does this calculator handle monthly contributions?
Monthly contributions are added at the start of each month (annuity due treatment). The calculator simulates period-by-period compounding, pro-rating contributions to match the selected frequency. This gives accurate results regardless of whether you choose daily, monthly, quarterly, or annual compounding.