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On This Page
- What is compound interest?
- How to calculate your savings
- Where to put your money to get the best return
What is compound interest?
Compound interest is when the interest you earn, earns interest. It helps boost the growth of your money over time.
Formula for calculating the final value of an investment that’s compounded:
Amount = P ( 1 + r/n ) nt
- P = initial investment;
- r = interest rate
- t = compounded periods per year
- n = number of years
Compounding frequencies
You should compare savings account yields by looking at annual percentage yields (APYs). Comparing APYs means you don’t have to worry about compounding frequency because the effects of compounding are already included in an APY. Comparing APYs will give you an apples-to-apples comparison of yields.
How to calculate your savings
- Type in how much you currently have saved.
- Decide on a timeline for your savings plan.
- Enter your interest rate into the calculator.
- Select how much extra you’ll save and how often you’ll be adding that extra contribution. (Tip: Split-deposit, when your employer automatically deposits some of your paycheck into a savings account, can help you reach your savings goals.)
- Enter how often the interest compounds.
Where to put your money to get the best return
You can deposit money to save for long-term goals – buying a house in 10 years – or relatively shorter-term goals, such as a wedding in two years.
$1,000 at 0.01 percent APY will only be $1,001 at the end of 10 years. But $1,000 at 5 percent APY will be $1,629 after 10 years. And if you added just $50 a month, you’d have $9,411 saved up – at 5 percent APY after 10 years. And if you added just $50 a month, you’d have $2,258 saved up. There are two lessons here: add money if you can and make sure you’re earning a competitive yield.
Automating your savings can help you reach your financial goals without having to remember to save. Automating your savings means money moves automatically into a savings account – either through a split direct deposit or through a recurring transfer from your checking to your savings account.
