Why the interest looks small
Take $500 a month for twelve months at 4 percent. It is tempting to read that as 4 percent of $6,000, or $240. The actual interest is $130. The reason is that you never have $6,000 earning interest for a year. You have $500 for twelve months, another $500 for eleven, another for ten, and so on down to one. Add those holding periods and you get 78 month-deposits rather than 144, which is 6.5 months on average out of twelve.
The arithmetic is the monthly rate times the sum of 1 through n, which for twelve months is 78. So the interest is 500 x (0.04/12) x 78 = $130.00. The same logic holds at any term, and it is why a deposit plan's effective yield on total contributions sits close to half the quoted rate. Nothing is being withheld from you; the money simply has not been in the account long enough.
| $500/month at 4% | Deposited | Interest | Return on deposits |
|---|---|---|---|
| 12 months | $6,000 | $130.00 | 2.17% |
| 24 months | $12,000 | $500.00 | 4.17% |
| 36 months | $18,000 | $1,110.00 | 6.17% |
Simple against compounded
The simple method credits each deposit with interest for the months it is held and pays no interest on interest. The compounded method grows each deposit at the monthly rate for the months remaining, so earlier interest earns too. Over twelve months at 4 percent the difference on $500 a month is $1.60. Over sixty months it is about $210, and past ten years the gap becomes the dominant part of the answer. Pick whichever matches the account: a fixed-term certificate that credits at maturity behaves like the simple version, an account that credits monthly behaves like the compounded one.
Tax is left to you on purpose
The tax field starts at zero and applies the rate you type to the total interest. That is deliberate. Interest inside a tax-advantaged retirement account is not taxed as it accrues. Interest in an ordinary savings account generally is taxed as ordinary income, at a rate that depends on your total income, and some jurisdictions add a state or local layer on top. No single number is right for every reader, so this page does not invent one. For an after-tax figure, put in your own marginal rate; for the gross figure, leave it at zero.
A short list of things the number ignores
- Inflation. A 4 percent return with 3 percent inflation is a 1 percent gain in purchasing power, and this page reports the nominal figure.
- Early withdrawal. Fixed-term products commonly pay a much lower rate, or forfeit some interest, if you break the term.
- Promotional rates that revert. A rate quoted for the first six months is not the rate for the term.
- Missed deposits. The arithmetic assumes every deposit lands, every month, on time.
Questions people ask
Why is $500 a month for a year at 4% only $130 of interest?
Because the average dollar is not in the account for a year. The first $500 earns twelve months of interest, the second eleven, and the last one month. Those holding periods add to 78 month-deposits instead of the 144 you would have if the whole $6,000 sat there all year. Multiply 500 by the monthly rate of 0.04/12 by 78 and you get exactly $130. The account is paying 4 percent annually; you are simply holding a fraction of the balance for a fraction of the year.
Is a lump sum better than depositing monthly?
For interest earned, yes, and by close to a factor of two at the same rate and term, because the whole balance is held for the whole period rather than an average of half of it. $6,000 deposited once at 4 percent for a year earns about $240; $500 a month earns $130. That is a comparison of interest, not a recommendation. Most people deposit monthly because that is when the money exists, and splitting an existing lump sum into monthly deposits into the same product costs interest for no benefit.
What if I miss a month or change the amount?
The calculation assumes an identical deposit every month with no gaps. A missed deposit costs both the principal and the interest that deposit would have earned over its remaining months, which is worth more early in the term than late. For an irregular plan, the closest approximation is to run the calculator on the amount you reliably deposit and treat anything above that as a separate short-term deposit. The page will not model a variable schedule.
Does this apply to a certificate of deposit?
Partly. A standard CD takes a single lump sum, so this monthly-deposit page is the wrong shape for it, and the compound interest calculator with a zero monthly contribution matches it better. Some institutions offer add-on CDs or share certificate plans that accept regular contributions, and those behave like the model here. Check whether the product credits interest monthly, quarterly or only at maturity, since that determines which interest method to select.