Compound interest calculator

What is compound interest and how does it work?

Compound interest is one of the most important concepts in saving and investing. It’s how your money grows when the interest you earn is reinvested and begins earning interest itself. Understanding how compound interest works can help you better estimate returns on savings accounts, GICs, and long-term investments.

Compound interest is what happens when interest earned from a previous period is added back to your principal (the initial amount of money you invested as cash), increasing your balance and, consequently, the amount of interest you’ll earn going forward. Through the power of compound interest, your savings and investment returns can grow exponentially as interest is continuously reinvested.

The frequency of compounding can occur annually, monthly, weekly, or daily. Typically, the more regularly your interest is compounded, the faster your balance will grow.

What is “interest on interest”?

Compound interest is often described as “interest on interest.” When you first deposit money into a savings account or GIC, only your principal contribution (initial cash deposit) earns interest. Once that interest is added to your balance, future interest is calculated on both your original deposit and the interest you’ve already earned.

As this process repeats over time, your returns can accelerate, especially in accounts or investments that allow interest to compound regularly and remain untouched for long periods.

Compound interest vs simple interest

Unlike compound interest (which is interest added onto interest), simple interest is applied to the initial deposit only and does not compound. That means any interest you make won’t increase your balance and earn higher interest. 

This also means that compounding periods have no effect on simple interest, as there is no compounding frequency to increase or decrease. 

Here's a breakdown of how compound interest versus simple interest impacts your returns assuming:

• An initial deposit of $3,000
• An interest rate of 7%

How to use the compound interest calculator

A compound interest calculator helps you project the growth of your money, whether it be in a savings account, GIC or equity investment (think stocks, ETFs, or bonds), to see whether you’ll get your desired yield. To calculate your compound interest, fill out the following fields:

• Initial investment: the principal amount you’ll be depositing or investing 
• Additional contributions: fill this out only if you plan on making regular contributions after your initial deposit or investment. Input the amount you plan on regularly contributing and select how often you expect the contributions to take place (eg. monthly, bi-weekly, etc.)
• Interest rate: the interest rate you expect to earn on your savings or investment
• Compound frequency: how frequently interest will be reinvested to the principal (eg. annually, semi-annually, etc.). Typically, savings accounts, GICs, and investments are compounded annually
• Time horizon (in years): The length of time you expect to keep your money in the account or investment

Once you’re done, you can then view your interest earned as well as the total value of your investment (principal plus interest). 

How to maximize your savings and investments with compound interest

Now that we’ve covered the basics of compound interest, here are a few tips to make sure you’re getting the most out of it:

Start saving and investing early

As with any saving or investing strategy, it’s wise to start as early as possible. The sooner you begin, the more powerful your compounding interest will get, and the less you’ll have to contribute out of your own pocket. 

Make additional contributions

If you’re looking to grow your money even faster, making additional contributions to your principal on a regular (or even semi-regular) basis can make a world of difference.

Let your money stay invested

To get the most out of compound interest, it’s important to let your money stay invested and avoid unnecessary withdrawals. Every withdrawal reduces the balance that future compound interest is calculated on, which can slow the long-term growth of your savings or investments.

What is compound frequency?

Compound frequency refers to the amount of times interest is compounded within a given year. While most investments (savings, GICs, etc.) compound annually, different compound frequencies can have substantial effects on the growth of your money. The more often interest is compounded, the faster your balance can grow. Let’s use a few examples to illustrate:

• Annual

Annual compounding is the most common compounding frequency. With annually compounded interest, any interest you earn is added to your balance once per year. As an example, let’s say you’ve kept $10,000 in a savings account with 5% interest for five years. By the end of your fifth year, your interest has been compounded a total of five times:

As you can see, even annually compounding interest can boost your principal on its own. 

• Monthly

Let’s see what would happen to that same principal deposit if the 5% interest was compounded monthly instead of yearly for five years:

Because interest is added more frequently, monthly compounding allows your balance to grow slightly faster than annual compounding over the same time period.

Calculate compound interest in GICs and other investments

Interest-earning products earn returns because financial institutions use deposited funds to support lending and other activities. In return, account holders are paid interest on their balances. Most savings accounts and GICs compound interest annually, making compound interest an important factor when estimating long-term returns.  

• High-interest savings account

While a regular savings account may pay out a modest amount of interest, a high-interest savings account is just what it sounds like: a savings account that allows you to earn a higher-than-average level of interest. For example, if you deposited $1,000 into a HISA with an interest rate of 4%, after a total of 4 years you would have $1,172. 

• GICs

GICs (or Guaranteed Investment Certificates)  are the safest and most secure investment product you can buy. With fixed-rate GICs, your principal and prescribed interest are both guaranteed through government-backed insurance, avoiding the rollercoaster ride associated with traditional stocks. 

When you purchase a GIC, you also select a term length. These can typically run anywhere from 30 days to five years, but your investment is meant to stay untouched for that length of time. While your interest can be compounded annually, you won’t actually get the full sum until your GIC reaches the end of its term.