Daily vs monthly compounding on $50,000: how much difference?

What daily compounding actually changes

Savings accounts and some deposit products advertise daily compounding, and it is natural to wonder whether that is worth switching banks for. The question is narrow and has a clear answer once you see the mechanics. A stated annual rate is a starting point, not the growth you actually receive. If the bank credits interest once a year, a 6% rate adds exactly 6% of the balance at the end of the year. If it credits monthly, it adds half a percent each month, and from the second month onwards part of that interest is earned on interest already credited, so the year ends a little higher. If it credits daily, the same happens three hundred and sixty-five times, in very small steps, and the year ends slightly higher again.

This page holds everything else fixed so that only that effect is visible: a single deposit of $50,000, nothing added later, a 6% stated rate and twenty years. The calculator steps through the period one month at a time, as it does on every page. For the daily and yearly settings it converts the stated rate into the monthly rate that produces exactly the same growth over a year, and applies that every month. Because no deposits arrive on this page, that convention makes no difference at all: the balance shown is exactly what daily crediting at 6% gives over twenty years.

The result is before tax and fees and is not adjusted for inflation. Real deposit rates also change over twenty years, so treat the figure as the answer to a controlled experiment rather than a prediction for any particular account. The point of the page is the comparison: the same money, the same rate, the same time, and only the crediting schedule changed.

How big the gap is on these inputs

Switch the compounding setting from daily to monthly and the final balance falls by less than one percent. Switch it to yearly and it falls further, because interest is credited twelve times less often than monthly. Moving the rate by a single percentage point, up or down, changes the balance far more than any of the three settings does. So when you compare accounts, the stated rate and how long you leave the money matter much more than the crediting schedule; daily compounding is a tie-breaker between otherwise equal offers, not a reason on its own to choose one.

Compound interest compared with simple interest

Simple interest pays a return only on the money you put in, never on earlier returns. The calculator works out that alternative for the same deposits so you can see what compounding itself adds. Your initial amount earns the stated rate once per year for the whole period, and each monthly deposit earns the same rate for the months it has been in the account, with nothing reinvested. The card that compares the two shows the simple-interest total and the difference between it and the compounded balance. Early on the two lines sit almost on top of each other, because the returns that could earn returns are still small. The gap opens slowly and then quickly, and in the chart it is the widening space between the curve and the straight line of contributions. That gap is the reason time in the account matters so much: most of it appears in the last third of a long period.

The rule of 72 and its exact form

The rule of 72 is a mental shortcut for doubling time: divide 72 by the annual return in percent and you get roughly how many years it takes for money to double with nothing added. At 6% the rule says 12 years. The exact answer comes from logarithms, the natural log of two divided by the natural log of one plus the rate, which at 6% gives about 11.9 years. At 9% the rule says 8 years and the exact figure is very close to it. The shortcut works because it is tuned for the middle of the range people usually use, and it drifts at very low or very high rates. The callout on the result shows both numbers for the rate you enter, so you can see how close the shortcut is. Doubling time applies to a single lump sum. With monthly deposits the balance grows faster than that, because new money keeps arriving.

What this calculator assumes, and what it leaves out

Every figure on this page comes from the same few assumptions. Deposits are made at the start of each month and never skipped. The annual return is constant for the whole period. Nothing is withdrawn. The results are before tax and before fees, and they are in future dollars, not adjusted for inflation, so a large balance decades from now will buy less than the same number would today. Taxes on interest and gains depend on the account type and where you live, and fund or platform fees reduce the return you actually keep, so a real account will usually end below the figure shown here. If you want a rough sense of the effect of fees, lower the annual return by the yearly cost you pay and run the numbers again. To think in today's money instead, enter a return that is already reduced by the inflation you expect. Neither adjustment is exact, but both move the projection closer to what you are likely to see.