Interest Calculator

Interest is the price of using someone else's money. When you deposit cash in a savings account or CD, the bank pays you interest for the use of your funds; when you borrow, you pay interest to the lender. It is usually stated as a yearly percentage of the amount involved, called the principal. This calculator looks at interest from the saver's side: how a balance grows over time.

Simple Interest

Simple interest is calculated only on the original principal. The formula is I = P × r × t: principal times annual rate times years. Lending a friend $1,000 at 4% simple interest for three years earns $1,000 × 0.04 × 3 = $120, or $40 every year, no matter how long the loan runs.

Simple interest is easy to work out but uncommon for savings. It shows up in some short-term loans, auto loans in certain states, and bonds that pay out their coupon instead of reinvesting it. For those cases, use the simple interest calculator.

Compound Interest

Compound interest is calculated on the principal plus all the interest already added to it. Each period's interest joins the balance and starts earning interest of its own, so growth speeds up over time. $10,000 at 5% compounded yearly earns $500 in the first year but about $776 in the tenth, and the balance reaches about $16,289 after ten years, compared with $15,000 under simple interest.

How often interest is added matters too. At a 5% nominal rate, compounding yearly gives an effective annual rate (APY) of 5.000%, monthly gives 5.116% and daily gives 5.127%. Continuous compounding, the mathematical limit, gives 5.127% as well (e^0.05 − 1). Frequency makes a modest difference at low rates and short horizons and a larger one over decades. When comparing accounts, compare APYs, which already include compounding.

A = P(1 + r/n)ⁿᵗ

A

ending balance

P

initial investment

r

annual interest rate as a decimal

n

compounding periods per year

t

time in years

Regular contributions each grow by the same formula from the date they are added. When deposits and compounding happen on different schedules, the calculator converts the rate to an equivalent monthly rate and steps through every month.

The Rule of 72

To estimate how long it takes money to double with compound interest, divide 72 by the annual rate. At 6%, money doubles in about 72 ÷ 6 = 12 years; at 9%, about 8 years. The shortcut is most accurate for rates between roughly 6% and 10%. The same trick works in reverse: to double your money in 10 years, you need a return of about 7.2% a year.

Fixed vs. Floating Interest Rate

A fixed rate stays the same for the whole term, as with most CDs and fixed-rate bonds, which makes the outcome predictable. A variable or floating rate moves with a benchmark, such as the federal funds rate or SOFR, plus a set margin. High-yield savings accounts, money market accounts and many credit cards use variable rates, so their earnings or costs shift when the central bank changes policy.

This calculator assumes one fixed rate for the whole period. For a variable-rate account, use your best estimate of the average rate, and rerun the numbers with higher and lower rates to see the range.

Contributions

Regular deposits, monthly or yearly, often matter more than the starting balance. Each contribution compounds from the day it is added, so earlier and steadier deposits grow the most. Choose whether deposits happen at the beginning or the end of each period: money added at the beginning earns interest for that period, so the ending balance is a little higher.

For example, $20,000 plus $5,000 a year at 5% compounded yearly grows to about $53,154 after five years with year-end deposits and about $54,535 with deposits at the start of each year.

Tax Rate

In the US, interest from bank accounts, CDs and most bonds is taxed as ordinary income in the year it is earned, even if you leave it in the account. Tax takes a slice of each year's interest before it can compound, which reduces growth more than the tax rate alone suggests over long periods. Enter your marginal tax rate to see the after-tax balance. Tax-advantaged accounts such as IRAs, 401(k)s and Roth accounts defer or remove this drag, and municipal bond interest is often exempt from federal tax.

Inflation Rate

Inflation is the general rise in prices over time, which means a dollar buys less in the future than it does today. US consumer prices have risen by roughly 3% a year on average over the long run, though individual years range from deflation to double digits. The buying-power result divides the ending balance by cumulative inflation, so it shows what your future balance is worth in today's dollars.

Taxes and inflation together set your real return. A 5% interest rate taxed at 24% leaves 3.8%, and with 3% inflation the real gain is under 1% a year. That is why long-term savings goals usually rely on tax-advantaged accounts and investments expected to outpace inflation.

Frequently asked questions

Sources

• Investor.gov – Compound Interest Calculator & Guide
• IRS – Topic No. 403, Interest Received
• U.S. Bureau of Labor Statistics – Consumer Price Index