How does compound interest work in a savings account?

Compound interest means you earn interest not only on your original deposit but also on the interest that has already been added to your account. Over time, this creates a snowball effect where your money grows exponentially rather than linearly. This calculator compounds interest monthly, which is how most savings accounts and CDs work.

What is the difference between APY and APR?

APR (Annual Percentage Rate) is the simple annual interest rate without compounding. APY (Annual Percentage Yield) accounts for the effect of compounding and is always equal to or greater than the APR. This calculator uses the annual interest rate (APR) and compounds it monthly. The effective APY will be slightly higher than the rate you enter due to monthly compounding.

How much should I save each month?

A common guideline is the 50/30/20 rule: allocate 50% of income to needs, 30% to wants, and 20% to savings and debt repayment. Financial advisors often recommend saving at least 10-15% of your gross income for retirement. Use this calculator to see how different monthly contribution amounts affect your long-term savings growth.

What is the Rule of 72?

The Rule of 72 is a quick mental math shortcut to estimate how long it takes for money to double. Divide 72 by the annual interest rate to get the approximate number of years. For example, at 6% interest, your money doubles in roughly 72 / 6 = 12 years. At 4%, it takes about 18 years.

Does this calculator account for taxes and inflation?

This calculator shows nominal returns before taxes and inflation. In reality, interest earned in taxable accounts is subject to income tax, and inflation erodes purchasing power over time. For a more accurate picture, you can subtract your expected tax rate from the interest rate, or reduce it by the expected inflation rate (typically 2-3% per year).

What is the best savings account interest rate?

High-yield savings accounts and CDs typically offer the best rates, which vary based on the Federal Reserve's benchmark rate. As of recent years, high-yield savings accounts have offered between 4-5% APY, while traditional banks often offer less than 0.5%. Use this calculator to compare how different rates affect your long-term savings growth.

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How to Use Savings Calculator

Enter your initial deposit (starting balance).
Set your planned monthly contribution amount.
Enter the expected annual interest rate.
Specify the number of years you plan to save.
View the projected final balance, contributions, and interest earned.
Expand the year-by-year breakdown to see detailed growth over time.

How Savings Growth Is Calculated

This calculator uses monthly compound interest to project your savings growth. Each month, interest is calculated on your current balance (including previously earned interest), and your monthly contribution is added. This compounds month over month, creating exponential growth.

The monthly interest rate is your annual rate divided by 12. For each month: New Balance = Previous Balance * (1 + monthly rate) + Monthly Contribution. Over many years, compound interest causes your savings to grow significantly faster than simple interest.

The power of compound interest is especially apparent over long time periods. Starting early and contributing consistently, even small amounts, can result in substantial wealth accumulation. The year-by-year breakdown shows how interest earned accelerates over time as your balance grows.

Savings Calculator

How to Use Savings Calculator

How Savings Growth Is Calculated

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