Interest Calculator

What is  Interest?

Interest is the cost of borrowing money or the reward for saving it. It’s usually shown as a percentage of the original amount, known as the principal. Interest is at the heart of most financial products, from loans and mortgages to savings accounts and investments.

There are two main types of interest: simple interest and compound interest. Understanding the difference can help you make smarter financial decisions.

Simple Interest Explained

Let’s break down a simple example. Say Derek borrows $100 from a bank for one year at a 10% interest rate.

$100 × 10% = $10

After one year, Derek owes:

$100 (principal) + $10 (interest) = $110

If the loan lasts two years and the interest is calculated annually without compounding:

Year 1: $10 interest
Year 2: $10 interest
Total repayment: $120

Simple Interest Formula:

Interest = Principal × Rate × Time

If interest is calculated more frequently (monthly or daily), the formula adjusts to include the number of periods:

Interest = Principal × Rate × Time ÷ Frequency

However, simple interest is rarely used in modern finance. Most interest in banking and investing is compound interest.

Understanding Compound Interest

Compound interest means you earn interest not only on the principal but also on previously earned interest. Let’s go back to Derek’s example.

Year 1: $100 × 10% = $10 → Total: $110
Year 2: $110 × 10% = $11 → Total: $121

With compound interest, Derek pays $121 instead of $120 under simple interest. Over time, this difference grows bigger, especially with frequent compounding.

The more often interest is compounded, the more your money grows. Here’s how a $1,000 investment with 20% interest performs at different compounding frequencies:

Annually → Less growth
Monthly, Daily → More growth
Continuously → Maximum growth
   

This is the power of compound interest, and it’s why it’s often called “interest on interest.”

The Rule of 72

Want a quick way to estimate how long it takes to double your money? Use the Rule of 72:

Years to double = 72 ÷ Interest Rate

Example: At 8% interest, it takes 72 ÷ 8 = 9 years to double your money.

This shortcut works best with rates between 6–10%, but it’s a helpful trick even outside that range.

Fixed vs. Floating Interest Rates

Interest rates come in two types:

• Fixed rate – stays the same for the loan or investment term.

• Floating rate – changes based on benchmarks like the Federal Reserve rate or LIBOR.

For example, a floating rate loan may rise if market rates go up. On the other hand, fixed-rate loans offer predictability, which is what this calculator is designed to handle.

Adding Regular Contributions

Our Interest Calculator also lets you include recurring contributions (like monthly savings). One key detail: adding money at the beginning of each compounding period earns more interest than adding at the end.

This feature helps model real-world savings plans like retirement contributions or college funds.

How Taxes Affect Interest Earnings

In many countries, including the U.S., certain types of interest income are taxable. For example:

• Corporate bonds – typically fully taxed

• Federal bonds – taxed federally but may be exempt from state taxes

Let’s see how this affects savings. If Derek saves $100 at 6% for 20 years, his balance without taxes:

$100 × (1 + 6%)²⁰ = $320.71

But if taxed at 25%, he only ends up with:

$239.78 – a big difference!

Always consider tax implications when calculating interest.

Don’t Forget About Inflation

Inflation reduces your money’s buying power over time. If inflation averages 3% annually, your savings need to grow faster than that just to keep their real value.

For context, the U.S. stock market (S&P 500) has returned about 10% on average over the last century, while inflation hovered around 3%. That’s why your real rate of return matters.

Tip: Set the inflation rate to 0 for basic calculations, but include it for more accurate results using our calculator.

Real Interest Rate = Nominal Rate – Inflation – Taxes

To truly grow your wealth, your interest earnings must outpace both inflation and taxes. For example, with a 25% tax rate and 3% inflation, you’d need at least 4%+ in returns to maintain your purchasing power.