See how compounding grows an investment over time. Choose how often interest is compounded and the calculator shows the maturity amount along with the effective annual rate it works out to.
The annual rate is divided by the number of compounding periods per year.
Each period, interest is added to the balance, so the next period earns interest on a larger amount.
More frequent compounding at the same nominal rate gives a slightly higher return — the effective annual rate expresses that as a single yearly figure.
Amount: A = P(1 + r/n)^(n × t)
Effective annual rate: EAR = (1 + r/n)^n − 1
n: Number of compounding periods per year
Why does quarterly compounding give more than yearly?
Because your interest is added sooner, and then it starts earning interest too. At a stated rate of 12%, yearly compounding gives you 12%. Quarterly compounding gives you about 12.55%, because of this extra effect.
What is the effective annual rate?
It is the single yearly rate that gives you the same result as the more frequent compounding you chose. It is the fairest way to compare two products that compound at different times.
What is the rule of 72?
A quick shortcut: divide 72 by your yearly return to guess how many years it takes for your money to double. At 12%, this is about six years. It is only an estimate, not an exact answer.