When you squirrel away money in a savings account, it usually earns at least a small amount of interest. Thanks to the law of compound interest, the little piles of cash you put away can eventually grow into a mountain of savings. A compound interest calculator can help you see this process in action.
Compound interest is best defined as interest that's paid on your principal and any interest that you've already accumulated. The rule of compound interest is applicable when you reinvest the interest that you've earned from your initial investment.
For example, let's say that last year you earned 10 percent interest on a $1,000 investment. If you choose to reinvest those earnings this year, you will earn 10 percent interest on the initial $1,000 as well as the $100 reinvestment.
Many people forget to include the interest in their calculations. So, they might assume that a $1,000 investment that earns 10 percent in the first year and another 10 percent in the second year will produce a total return (over two years) of $200. In fact, once the interest is factored in, the return will be $210.
It's plain to see that compound interest can help you earn a lot more money over time than simple interest. But how can you determine exactly how much compound interest you can earn from your investments?
Save time and effort by plugging your numbers into Bankrate's compound interest calculator, a handy tool that does all of the math for you. It will show you how savings can really add up when interest is compounded over long periods of time.
Right now, interest rates in savings accounts are very low. But at some point, the Federal Reserve will likely begin raising its target federal funds rate. As this happens, rates on savings accounts should rise, as will your compound interest.
A compound interest calculator can show you just how quickly your savings will grow over the years thanks to the wonders of compound interest.