Question 1

How does compound interest work?

Accepted Answer

Compound interest earns interest on both your principal and all previously earned interest. This creates a snowball effect where growth accelerates over time. The longer your money compounds, the more dramatic the difference becomes compared to simple interest, which only earns on the original principal.

Question 2

What does Rate Period mean?

Accepted Answer

Rate Period tells the calculator what timeframe your entered interest rate covers. Most savings accounts and investments quote an annual rate, so 'Annually' is the default. If your bank quotes a monthly rate (common in some countries), select 'Monthly' and enter that rate — the calculator will convert it to an effective annual rate before computing. A 1% monthly rate is not the same as 12% annually; it compounds to about 12.68% per year.

Question 3

What is Compound Frequency and why does it matter?

Accepted Answer

Compound Frequency is how often the bank or investment adds earned interest back to your balance. Daily compounding means interest is calculated and added every day; monthly means once a month. More frequent compounding produces a higher balance because each interest payment starts earning its own interest sooner. The difference between daily and monthly compounding is small in practice, but daily compounding on a 5% rate produces an APY of 5.127% versus 5.116% for monthly.

Question 4

What is APY?

Accepted Answer

APY (Annual Percentage Yield) is the effective annual rate after compounding is applied, calculated as (1 + r/n)^n − 1. It is always equal to or higher than the nominal rate you entered, because compounding adds interest on top of interest within the year. APY is the most useful number for comparing accounts with different compounding frequencies.

Question 5

What does Annual Contribution Increase do?

Accepted Answer

This lets you model contributions that grow over time. If you set it to 3%, your contribution amount increases by 3% at the start of each year from year 2 onward. This is useful for salary-linked savings plans where you expect to save more as your income grows. Leave it at 0% if you plan to contribute the same fixed amount every year.

Question 6

What is Deposit Timing?

Accepted Answer

Deposit Timing controls whether each contribution is added before or after interest accrues for that period. 'End of Period' (the default) means contributions arrive after interest is calculated, so they earn no interest in that period — this is called an ordinary annuity. 'Beginning of Period' means contributions arrive first and earn a full period of interest before the next cycle — this is called an annuity due. Beginning-of-period always produces a slightly higher final balance. The difference is modest but mathematically real.

Question 7

What is the Rule of 72?

Accepted Answer

Divide 72 by the annual interest rate to estimate how many years it takes to double your money. At 6% it takes roughly 72 / 6 = 12 years. This calculator uses the more precise Rule of 69.3 for the 'Time to Double' result, which is more accurate at lower interest rates.

Compound Interest Calculator