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Your savings account balances and investments can grow faster over time with the magic of compounding. Use the compound interest calculator above to see what a difference it could make for you.
Use this compound interest calculator
Try your calculations with and without a monthly contribution – say, $50 to $200, depending on what you can afford.
This savings calculator includes an example rate of return. To see the interest you can expect, compare rates on NerdWallet.
LendingClub High Yield Savings
Synchrony Bank High Yield Savings
Capital One 360 Performance Savings™
Here’s a more in-depth look at how composition works:
What is compound interest?
For savers, the definition of compound interest is basic: it’s the interest you earn on both your initial money and the interest you continue to accumulate. Compound interest allows your savings to grow faster over time.
In an account that pays compound interest, like a standard savings account, the return is added to the original principal at the end of each compounding period, usually daily or monthly. Each time interest is calculated and added to the account, the higher balance earns more interest, which results in higher returns.
For example, if you put $10,000 in a savings account with an annual return of 0.50%, compounded daily, you would earn $51 in interest in the first and second year and $53 in the third year. After 10 years of compounding, you would have earned a total of $513 in interest.
But remember, this is just an example. For longer term savings, there are better places than savings accounts to store your money, including Traditional Roth or IRA and CD.
Compound return of investments
When you invest in the stock market, you do not earn a fixed rate of interest but rather a return based on the change in the value of your investment. When the value of your investment increases, you get a return.
If you leave your money and the returns you earn invested in the market, those returns are compounded over time in the same way that interest is compounded.
If you invested $10,000 in a mutual fund and the fund returned 7% for the year, you would earn about $700 and your investment would be worth $10,700. If you got an average return of 7% the following year, then your investment would be worth about $11,500.
Over the years, your investment can really grow: if you kept that money in a retirement account for 30 years and got that average return of, say, 7%, your $10,000 would grow to over $76,000.
In reality, returns on investment vary from year to year and even day to day. In the short term, riskier investments such as stocks or mutual funds can actually lose value. But over a long-term horizon, history shows that a diversified growth portfolio can return an average of 6-7% per year. Investment returns are generally presented at an annual rate of return.
The average stock return is historically 10% annually, although this rate is reduced by inflation. Investors can currently expect inflation to reduce purchasing power by 2-3% per year.
Compounding can help you achieve your long-term savings and investment goals, especially if you have time to let its magic work for years or decades. You can earn a lot more than what you started with.
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Compounding with additional contributions
As impressive as compound interest can be, progress toward savings goals also depends on making regular contributions.
Let’s go back to the savings account example above. We started with $10,000 and ended up with just over $500 in interest after 10 years in an account with an annual return of 0.50%. But by depositing an additional $100 each month into your savings account, you would end up with $21,821 after 10 years, when compounded daily. Interest would be $821 on total deposits of $22,000.