Compound Interest Calculator
Updated 6 January 2020
Assumptions:
- The initial deposit is made today
- Interest is credited either monthly, quarterly, half yearly or annually, in line with standard New Zealand practice
- The results of this calculator are shown in future dollars
- No adjustment has been made for inflation
- Learn more with our 'interest rates explained' guide
Compound Interest Defined
Compound interest is the addition of interest to the original amount of a loan or deposit, whereby interest calculated is re-invested into the original amount (or added to the loan), so that interest in the next period is then earned (or charged, if it is a loan) on the principal sum plus previously accumulated interest.
Compound Interest - A Win For Savers
Compound interest increases returns on savings and investments, but at the same time increases the cost of debt. The calculator above shows the compounding returns of an investment or the true cost of compounding debt.
Compound interest works best as an investment tool - for example, if you deposit $1,000 in the bank and earn 5% per year, with interest paid every month, the interest earned each month is re-invested with your original $1,000 and begins to earn its own interest. As a rule, the longer money is invested and interest added, the greater the compounding interest effect and the more money you will save.
Our calculator helps you to easily calculate compound interest in seconds, making financial decisions easier. Frequently asked questions below have been included to explain the concept of compound interest better.
Compound interest is the addition of interest to the original amount of a loan or deposit, whereby interest calculated is re-invested into the original amount (or added to the loan), so that interest in the next period is then earned (or charged, if it is a loan) on the principal sum plus previously accumulated interest.
Compound Interest - A Win For Savers
Compound interest increases returns on savings and investments, but at the same time increases the cost of debt. The calculator above shows the compounding returns of an investment or the true cost of compounding debt.
Compound interest works best as an investment tool - for example, if you deposit $1,000 in the bank and earn 5% per year, with interest paid every month, the interest earned each month is re-invested with your original $1,000 and begins to earn its own interest. As a rule, the longer money is invested and interest added, the greater the compounding interest effect and the more money you will save.
Our calculator helps you to easily calculate compound interest in seconds, making financial decisions easier. Frequently asked questions below have been included to explain the concept of compound interest better.
Frequently Asked Compound Interest Questions
|
How do I earn Compound Interest?Bank deposits and term investments all earn interest, but the frequency of how often they pay the interest affects the compound interest you can receive. For example, if you invest $1,000 with Bank ABC for 12 months and it pays 5.00% p.a. interest on a monthly basis, the interest you earn will compound every month. Alternatively, if the interest is only paid at the end of the 12 months, then there is no compounding interest.
|
|
Which is better, 'Simple interest' or 'Compound interest'?When it comes to savings and investing, compound interest is better. This is because simple interest is calculated only on the original investment and paid at the end of the term, where as compound interest is calculated on the original investment amount and the accumulated interest earned over previous periods. For this reason compound interest is known as "interest on interest.”
|
|
What is the purpose of compound interest?Compound interest is attractive if you are earning it - bank deposits and term deposits usually pay compounded interest. However, if you are in debt, credit cards typically charge compound interest on the principal amount and the accumulated interest owed. This means that if you have an unpaid $1,000 credit card bill, you'll pay interest on the amount due. Whatever you don't pay will continue to be charged interest, so you will need to pay interest on the interest charged, as well as the original debt.
|
|
What is an example of compound interest?In the example below, you can see a $10,000 investment earning 5.00% p.a. earns $500 of interest in year one, growing to $525 and $551.25 in year 2 and 3 because of the effect of compound interest. The interest earned from each period (I) is added to the opening balance (O) and increases each year as a result of the 5.00% interest rate being applied to a bigger balance.
|
|
How often is interest compounded?The most common compound interest-earning investment is a bank account and it is common for interest to be paid daily or at least monthly. For mortgages, personal loans and credit cards, interest is typically compounded monthly. Cards like GEM Visa and the Q Card compound interest daily.
|
