Calculate Compound Interest (savings account) income – enter your principal amount, APR or interest rate, extra monthly investment (optional), and compounding frequency, and see how fast the money will grow!
Total Interest Income: $0
Total Gain: %
Total Investment: $0
Compounding means you earn interest on your investment, and then you earn even more interest on both your original amount and the interest added over time.
Let’s say you put $10,000 into an account with a 6% annual interest rate that compounds monthly. Initially, you earn $50 in interest after the first month. For the next month, you earn interest not just on your original $10,000 but also on the new total which includes the first month’s interest, making your interest for the second month a bit more than the first, $50.25, bringing your total to $10,100.25. This process continues, with your interest earning slightly increasing each month.
If you were to compound yearly instead, by the end of the year, you’d have $10,600. With monthly compounding, you end up with $10,617, which is an extra $17. It might not seem like a lot at first, but over time, these small amounts add up significantly.
For a clearer example, imagine you withdraw your interest earnings every month, leaving just the original $10,000 in the account. Over 10 years, you’d get $6,000 in interest. But, if you let that interest stay in the account and compound, you’d end up earning $8,194, which is about 35% more.
The real magic of compounding shows over longer periods. Over 20 years, withdrawing your interest monthly gives you $12,000 in interest. If you let it compound, you’d earn $23,102, nearly double!
Compounding interest is quite powerful, isn’t it? The catch with savings accounts is that their interest rates change over time, often based on the Federal Reserve’s decisions. Though rates are high now, they’ve been below 1% for much of the past 10-15 years.
DRIP (Dividend Reinvestment) is Compounding on Steroids!
Interest rates will not always be as high as they are right now. Soon, FED will begin cutting rates and all the HYSA interest rates will drop to a range of 1-3% or lower, as they were before 2022.
The real power of compound is investing in Quality Dividend Paying Stocks and DRIP, or compounding Dividend Reinvestment, where the “APR” grows with time, as dividends are increased!
For example: S&P500 (as tracked by SPY – S&P500 ETF) has returned an average of 8.874% per year over last 30 years (including dividends). If you reinvested the dividends to buy more of SPY shares, your return (CAGR) was 10.201% per year.
This may seem insignificant, but over 30 years a $10,000 investment in SPY grew to $139,168 without DRIP, and $205,308 with DRIP! That’s a whooping 47% higher total return with DRIP!
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