How compound interest works

Compound interest is interest earned on both your original deposit and on interest that has already been added to your balance. This creates a snowball effect - your money grows faster over time because each interest payment is calculated on a progressively larger balance.

This calculator uses monthly compounding, which means interest is calculated and added to your balance twelve times per year. The effective annual rate shown accounts for this compounding effect and will be slightly higher than the nominal annual rate you enter.

For example, a 5% nominal annual rate compounded monthly produces an effective annual rate of approximately 5.116%, because the interest earned each month itself earns interest in subsequent months.