Compounding Frequency Calculator

Nominal rate versus effective rate

A nominal rate of 6 percent means something different depending on how often interest is added. Compounded annually it produces exactly 6 percent. Compounded monthly it produces 6.17 percent, and daily 6.18 percent. The effective annual rate is what actually happens to the balance and is the only figure that allows a fair comparison between products quoting different compounding frequencies.

Frequency matters far less than people think

The gap between annual and monthly compounding is meaningful. The gap between monthly and daily is tiny: on 6 percent, monthly gives 6.168 percent and daily 6.183 percent, a difference of about 1.50 per 10,000 saved per year. Marketing that emphasises daily compounding is selling a rounding error. The headline rate matters enormously; the frequency, past monthly, barely registers.

The ceiling

Compounding more often has a mathematical limit. As frequency approaches infinity the effective rate converges on continuous compounding, e raised to the nominal rate minus one, which for 6 percent is 6.184 percent. Daily compounding already reaches 6.183 percent, so continuous compounding is essentially indistinguishable. No product can escape this ceiling by compounding faster.

It cuts both ways on debt

Credit cards typically compound daily, which is why a balance carried across months grows faster than the quoted annual rate suggests. The same mathematics that adds slightly to savings adds slightly to debt, but debt rates are several times higher, so the absolute effect is much larger. A 20 percent card compounding daily has an effective rate above 22 percent.

Check the compounding basis before comparing

Products quote inconsistently: some advertise the nominal rate, some the effective rate, and regional conventions differ. Converting everything to an effective annual rate before comparing is the only reliable approach, and it occasionally reverses which offer looks better.