Compound Interest Calculator Canada

How does compound interest work?

**Compound interest calculates interest on both your original principal and all previously earned interest.** Unlike simple interest, which only applies to the principal, compound interest creates exponential growth because each interest payment becomes part of the base for the next calculation.

The core formula is A = P(1 + r/n)^(nt) + PMT x [((1 + r/n)^(nt) - 1) / (r/n)], where P is the principal, r is the annual interest rate, n is the number of compounding periods per year, t is the number of years, and PMT is the periodic contribution. This formula accounts for both the growth of your initial deposit and the growth of each regular contribution.

For example, if you invest $10,000 at 5% compounded monthly for 10 years, you earn $6,470 in interest for a total of $16,470. With simple interest, you would earn only $5,000 (5% x $10,000 x 10). That extra $1,470 is the compound effect: interest earned on your accumulated interest.

The power of compounding increases dramatically over longer periods. The same $10,000 at 5% monthly grows to $27,126 in 20 years and $44,677 in 30 years. The interest earned in the final decade alone ($17,551) exceeds the interest earned in the first two decades combined. This is why financial advisors emphasize starting early.

How does compounding frequency affect your returns?

**More frequent compounding produces higher returns, but the differences become smaller as frequency increases.** Moving from annual to monthly compounding has a meaningful impact, while the difference between daily and continuous compounding is negligible for most investors.

Here is why: with annual compounding at 6%, your $10,000 earns $600 in the first year. With monthly compounding, you earn interest on a slightly larger balance each month because January's interest gets added to the principal before February's interest is calculated. Over 10 years, monthly compounding produces $18,194 compared to $17,908 with annual compounding, a difference of $285.

Canadian GICs typically compound annually or semi-annually. High-interest savings accounts (HISAs) at institutions like EQ Bank or Tangerine often compound daily or monthly. When comparing rates across products, check both the stated rate and the compounding frequency to get the true effective annual rate.

The effective annual rate (EAR) converts any compounding frequency to a single annual number for comparison. A 5% rate compounded monthly has an EAR of 5.12%, while the same 5% compounded daily has an EAR of 5.13%. The calculator above shows your EAR automatically.

Why are regular contributions the biggest growth driver?

**Regular monthly contributions have a far greater impact on your final balance than compounding frequency or even interest rate.** A $10,000 initial investment at 5% monthly compounding grows to $16,470 in 10 years. Adding just $200/month turns that into $47,517, nearly tripling the outcome.

Each contribution you make starts its own compounding journey. Your January deposit earns compound interest for the rest of the year, your February deposit earns for 11 months, and so on. Over 20 years of contributing $200/month at 5%, your total deposits are $58,000, but compound interest adds an additional $24,549 on top of that.

Dollar-cost averaging is a natural benefit of regular contributions to market-linked investments. By investing a fixed amount each month, you buy more units when prices are low and fewer when prices are high, which reduces the impact of market volatility on your average purchase price.

The key principle is consistency. Contributing $200 every month for 30 years at 5% produces $166,452 in total value ($82,000 contributed, $84,452 in interest). Starting just 5 years later and contributing for 25 years instead gives you $119,347 ($70,000 contributed, $49,347 in interest). Those 5 years cost you $47,105 in lost growth.

How does compound interest work in a TFSA versus an RRSP?

**In a TFSA, all interest and investment growth are completely tax-free, both while growing and when withdrawn ([Canada.ca](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html)).** In an RRSP, growth is tax-deferred: you pay no tax while the money compounds, but withdrawals are taxed as ordinary income.

The 2026 TFSA contribution limit is cumulative since 2009. If you have never contributed and were 18 or older in 2009, your total room is approximately $102,000. The annual limit for 2026 is $7,000. You can hold GICs, savings accounts, stocks, bonds, and mutual funds inside a TFSA. Any interest earned within the account is never taxed.

The RRSP contribution limit is 18% of your previous year's earned income, up to a maximum of $32,490 for 2026. Contributions are tax-deductible, which provides an immediate tax refund. However, all withdrawals are taxed at your marginal rate. RRSPs are most beneficial if your tax rate at withdrawal (typically in retirement) is lower than your current rate.

For compound interest on fixed-income investments like GICs and savings accounts, the TFSA is generally more advantageous because the interest is modest and would otherwise be taxed at your full marginal rate. Interest income receives no preferential tax treatment in a non-registered account, unlike capital gains or eligible dividends.

What is the Rule of 72 and how does it relate to compound interest?

**The Rule of 72 is a quick mental shortcut: divide 72 by your annual interest rate to estimate how many years it takes for your money to double.** At 6%, your money doubles in approximately 12 years (72 / 6 = 12). At 3%, it takes 24 years. At 9%, it takes 8 years.

The rule is derived from the compound interest formula. When solving for the time it takes an investment to double (A = 2P), the natural logarithm of 2 is approximately 0.693. For annual compounding at common rates (4% to 10%), 72 provides a slightly more accurate approximation than 69.3 because it accounts for the discrete compounding effect. It also divides evenly by more common rates, making mental math easier.

The Rule of 72 works best for rates between 4% and 12%. At very low rates (below 2%) or very high rates (above 20%), the approximation becomes less accurate. For continuous compounding, the Rule of 69.3 is more precise.

You can also use the rule in reverse to estimate what rate you need to achieve a doubling goal. If you want to double your money in 10 years, you need approximately 72 / 10 = 7.2% annual return. This helps set realistic expectations for your investment strategy.

Worked example: calculating compound interest for a Canadian TFSA

**Step 1: Enter your initial investment.** You open a TFSA with $5,000 deposited into a GIC or high-interest savings account.

**Step 2: Set your monthly contribution.** You plan to contribute $300 per month ($3,600 per year), which is within the annual TFSA limit of $7,000.

**Step 3: Set the interest rate.** Your GIC pays 4.0% annually. This is within the current Canadian range of 2.25% to 3.85% for posted rates, though some promotional rates are higher.

**Step 4: Choose compounding frequency.** Your GIC compounds annually (once per year). Select "Annual" in the calculator.

**Step 5: Set the investment period.** You plan to invest for 15 years.

**Step 6: Review the results.** Starting with $5,000 and contributing $300/month at 4% compounded annually for 15 years, your future value is approximately $79,957. You contributed $59,000 in total ($5,000 initial + $54,000 in monthly contributions), and earned approximately $20,957 in compound interest. Inside a TFSA, that $20,957 is completely tax-free.