Interest Calculator

Use our powerful Interest Calculator to compute interest payments and project your final balances using fixed principal amounts and regular periodic contributions. Beyond basic interest, this tool lets you factor in crucial real-world variables like income tax and inflation.

Looking to compare specific compounding frequencies? Visit our dedicated Compound Interest Calculator to learn more.

At its core, interest is the cost of borrowing money or the financial reward for lending it. This concept of interest forms the foundation of virtually all financial instruments worldwide. Generally, interest accrues in one of two ways: simple or compound.

Simple Interest

Let's look at a basic example of simple interest. Suppose Daniel borrows $100 from a bank for one year (the “principal”) at an annual interest rate of 10%. To determine the accrued interest, the calculation is straightforward:

$100 × 10% = $10

After one year, Daniel must repay the loan’s principal plus the accrued interest, determining the total amount owed to the bank:

$100 + $10 = $110

So, after one year, Daniel owes the bank $110: $100 in principal and $10 in interest. Now, suppose Daniel wanted to borrow that same $100 for two years instead of one, with the bank charging simple interest annually. The 10% interest rate would apply twice—once at the end of the first year, and once at the end of the second year.

$100 + $10(first year) + $10(second year) = $120

Two years later, Daniel owes a total of $120 in principal and interest. You can apply the following standard formula to calculate simple interest:

Interest = Principal × Interest rate × Term

If you need to calculate interest for periods other than full years (such as daily or monthly), use this adjusted formula:

Interest = Principal × Interest rate × (Term / Frequency)

In reality, simple interest is rarely used in everyday consumer finance. When we talk about "interest" in banking, investing, or daily speech, we are almost always referring to compound interest.

Compound Interest

To fully understand compound interest, we must look at growth over multiple periods. Let's return to Daniel, who is now borrowing $100 for two years at a 10% compound interest rate. During the first year, the interest is calculated normally:

$100 × 10% = $10

When this first year concludes, the $10 in interest is added to the principal balance:

$100 + $10 = $110

As the second year begins, the interest is no longer calculated on the original $100. Instead, it is calculated on the new balance of $110 (the principal plus previously accrued interest):

$110 × 10% = $11

At the end of year two, the interest charge is $11. Upon completion of the year, this amount is then added to the outstanding balance:

$110 + $11 = $121

If the bank used simple interest, Daniel would only owe $120. But because of compound interest—which effectively charges "interest on the interest"—his total repayment is $121.

The more frequently interest compounds, the faster the balance grows. Below is a chart illustrating how a $1,000 investment grows at a 20% interest rate across various compounding frequencies.

While the differences in frequency might seem minor initially, they become substantially more pronounced over time. This visual perfectly demonstrates the power of compound interest. Continuous compounding will always yield the highest possible return due to the mathematical limit on how often compounding can occur within a specific timeframe.

The Rule of 72

The Rule of 72 is a handy mental math shortcut for anyone wanting to estimate the power of compound interest without a financial calculator. It helps you quickly figure out approximately how many years it will take to double an investment. Simply divide the number 72 by your expected annual interest rate to find the number of years (n).

For example, how long would it take to turn a $1,000 investment into $2,000 at an 8% annual return?

n = 72/8 = 9

At an 8% interest rate, it would take roughly nine years to double your money. While this rule is most accurate for interest rates between 6% and 10%, it remains remarkably reliable for almost any rate under 20%.

Fixed vs. Floating Interest Rate

Savings accounts and loans typically feature either fixed or floating interest rates. Floating-rate (or variable) products are tied to a benchmark economic rate, such as the US Federal Reserve funds rate or the London Interbank Offered Rate (LIBOR). Generally, the interest rate banks offer on savings is lower than these reference rates, while the rate they charge for loans is higher. The bank profits from this spread.

LIBOR is a commercial interbank rate based on lending between highly creditworthy banks, while the Fed rate is the primary tool used by the US Federal Reserve to manage the United States economy's money supply. Both are key short-term interest rates.

Note: Our Interest Calculator is designed specifically to support fixed interest rates.

Contributions

Our interest calculator allows you to factor in regular deposits and periodic contributions. This feature is highly valuable if you are building a savings strategy and habitually setting aside a specific amount on a regular basis. An essential detail to consider is whether you make these contributions at the beginning or the end of the compounding period. Making periodic payments at the end of the period results in one less compounding cycle for those specific contributions, subtly impacting your final balance.

Tax Rate

Keep in mind that many forms of interest income are taxable. In the United States, interest earned on corporate bonds, savings accounts, and certificates of deposit (CDs) is generally subject to taxation. While US federal treasury bonds are taxed at the federal level, they are often exempt from state and local taxes.

Over time, taxes can drastically impact your investment growth. Consider a scenario where $100 is invested at a 6% interest rate for 20 years. Without taxes, the calculation looks like this:

$100 × (1 + 6%)²⁰ = $100 × 3.2071 = $320.71

This $320.71 is the tax-free total. However, if that growth is subjected to a 25% marginal tax rate applied to each compounding period, the final balance significantly drops to just $241.17.

Inflation Rate

Inflation is the gradual increase in the price of goods and services over time. Because of inflation, a fixed sum of money will possess less purchasing power in the future than it does today.

Historically, the average inflation rate in the United States over the past century has hovered around 3%. By comparison, the S&P 500 index (Standard & Poor's) has generated an average historical annual return of roughly 10% over the same period.

Combining taxes and inflation reveals how challenging it can be to grow your real wealth. If the average middle-class marginal tax rate in the US is roughly 25% and average inflation is 3%, you would essentially need an interest rate of 4% or higher just to maintain your money's current purchasing power.

To dive deeper into how inflation impacts your wealth, visit the Inflation Calculator section of our website. If you prefer to view generic results without adjusting for inflation, simply leave the inflation rate at 0 in our Interest Calculator.