How it’s calculated
With compound interest, interest is added to the balance and then earns interest itself. The initial deposit grows with the compound interest formula; monthly contributions grow as an annuity.
Example (OpenStax Contemporary Mathematics): $5,000 at 3.8% compounded monthly for 5 years grows to 5,000 × (1 + 0.038/12)^60 = $6,044.43. Add $100 a month and the contributions add 100 × ((1.0031667)^60 − 1) ÷ 0.0031667 ≈ $6,596 more.
Returns on investments are not guaranteed. Rates of return vary over time.
Frequently asked questions
How often should interest compound?
More frequent compounding earns slightly more: 5% compounded monthly is a 5.116% APY, daily about 5.127%. Compare accounts by APY.
What is the rule of 72?
Divide 72 by the annual rate to estimate the years to double your money. At 6%, about 12 years.
When are contributions added?
At the end of each month (an ordinary annuity). Contributions at the start of each month would earn one extra month of interest.
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Sources
- Compound Interest Calculator — U.S. Securities and Exchange Commission (Investor.gov)
- Contemporary Mathematics, §6.4 Compound Interest — OpenStax
- Contemporary Mathematics, §6.6 Methods of Savings — OpenStax
Formulas are taken from the free public references above. Results are provided “as is” for informational and educational purposes only. See our disclaimer.
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