Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal, so the interest amount stays constant each year. Compound interest is calculated on the principal plus all previously earned interest, so your balance accelerates over time. The difference grows dramatically over longer periods.
How does compounding frequency affect my earnings?
More frequent compounding means interest is added to your balance sooner, so it starts earning its own interest earlier. Daily compounding earns slightly more than monthly, which earns more than annually. The difference is modest at low rates and short terms but can add up over decades.
What rate should I use for a savings account?
Use the APY (Annual Percentage Yield) your bank quotes, which already accounts for compounding. High-yield savings accounts currently offer 4–5%, while standard accounts may offer under 1%. Check your bank's current rate rather than using a historical average.
Is the interest rate the same as APY?
Not exactly. APY (Annual Percentage Yield) includes the effect of compounding over a year, so it's slightly higher than the nominal rate when compounding is more frequent than annual. If your bank quotes APY, set compounding to 'Annually' to avoid double-counting the compounding effect.
When would I choose simple interest over compound?
As a borrower, simple interest costs less because interest never compounds on itself. Some auto loans and short-term personal loans use simple interest. As a saver or investor, you always want compound interest to maximize earnings.
Does this account for taxes on interest?
No. This calculator shows gross interest before taxes. Interest income is typically taxable in the year it's earned (or credited, for compound interest). Your actual after-tax return depends on your tax bracket and the type of account.