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How Will Monthly Compound Interest Affect Your Investments?
Compound interest – you've heard of it, but what is it?
Banks and other financial institutions regularly publish the interest rates they pay on money. You might be tempted to multiply the interest rate by the amount you plan to invest. The result is called simple interest. Simple interest is the amount of interest paid based on the principal balance alone.
Compound interest, on the other hand, occurs when your interest earned then earns additional interest.
Using this monthly compound interest calculator, you can accurately determine the result of compound interest on your investments when compounded monthly. Monthly compound interest is the most common method used by financial institutions.
Interest Matters – An Example
Earning interest – including compound interest – has profound effects on your investments.
For example, if you are depositing $10 monthly and it is compounded at 5% annually, your money will grow to $4,127.46 at the end of 20 years. Whereas, if you just keep this money in your safety deposit box, you will only have $2,400 at the end of 20 years. See the difference? Your money almost doubled its value.
How Compound Interest Affects Your Investments
Monthly compound interest does not make a noticeable difference when your money is in short-term investments. That's because it takes years for the compounding to produce a noticeable effect.
Related: Learn how to invest like Todd
The key thing to realize is how compound interest will make your investments grow faster than simple interest. And the more frequent your compounding interval, the larger the difference. In other words, daily compound interest produces more income from your investments than annual compound interest for any given interest rate.
Compound Interest Key Concepts
- Compound interest works well with investments but can be very dangerous if applied to your loan.
- Compounding is more effective if your investment is compounded monthly or quarterly instead of annually. When you're the borrower then annual compounding is better. When you're the lender then daily compounding is better. Remember, compounding can work for you or against you depending on the situation.
- Compound interest grows faster than you think. The more money you add to your investment accounts and the longer you invest, the more interest you will earn.
Choose The Right Investment
There are many pros and cons to consider when choosing an investment. Some investment products return higher yields but carry greater risk.
If you cannot stomach risk right now, save a few dollars every month and put it into a savings account that compounds monthly. Even small deposits can make a big difference in the future.
To choose the right investment, evaluate your goals, check your capacity to tolerate risk, and carefully study the market to find which investment products work best for you.
Related: Better investing through process, not product
Regularly saving money and investing wisely are essential components to building wealth – use the Monthly Compound Interest Calculator and see what you can achieve!
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Compound Interest Calculator Terms & Definitions
- Current Savings Balance –The money you already have saved that will be applied toward your savings goal.
- Monthly Deposit – How much money you're planning on depositing every month over the number of years to compound.
- Annual Interest Rate (ROI) –The annual percentage interest rate your money earns if deposited.
- Number of Years to Compound –The number of years your money will compound on a monthly basis.
- Future Value – The value of your account, including interest earned, after the number of years to compound.
- Compound Interest Earned – The amount of compound interest earned after the number of years to compound.
Related Savings Calculators:
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- Savings Account Calculator: How long until I reach my savings goal given the amount I'm currently saving each month?
- Compound Interest Calculator – Daily To Yearly: What will my savings grow to when varying the deposit intervals and the compound intervals from daily to yearly (and everything in between)?
- Future Value Calculator: What will be the future value of my savings growth after adjusting for taxes and inflation?
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