Guide
Daily vs Monthly vs Yearly Compounding
Compounding frequency is how often interest is added. More frequent compounding usually nudges the ending value up a bit. Here’s how n=1/12/365 compares.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
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Toggle yearly, monthly, and daily compounding to see how the numbers move.
Open the calculatorQuick answer
Frequency is how many times per year interest is added (n). More frequent compounding usually increases the ending value slightly. See how APY moves here: effective annual rate explained.
Disclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and rules vary by provider and country.
What compounding frequency means
Frequency is how often interest is credited (n). Common options:
- Yearly: n = 1
- Monthly: n = 12
- Daily: n = 365
n = 1 / 12 / 365 comparison
Example: £1,000 principal, 5% nominal rate, 10 years.
| Frequency | n value | Ending balance (approx.) | APY/EAR (approx.) |
|---|---|---|---|
| Yearly | 1 | ~£1,629 | 5.00% |
| Monthly | 12 | ~£1,647 | ~5.12% |
| Daily | 365 | ~£1,648 | ~5.13% |
What changes vs what doesn’t
What changes
- Ending balance (slightly higher with more frequent compounding)
- Effective annual rate/APY
- When interest is credited
What doesn’t
- Your chosen nominal rate input
- Time horizon you set
- Contribution amounts (though timing still matters for growth)
When frequency matters more (and less)
- Matters more: higher rates, longer timeframes, larger balances.
- Matters less: short timeframes, low rates.
Time and contributions often move results more than frequency.
How to test this in the calculator
- Enter principal, rate, and years.
- Switch between yearly, monthly, and daily compounding.
- Compare ending balances and APY/EAR.
Common misconceptions
- “Daily compounding is dramatically better.” It’s usually only a small lift.
- Mixing APR and APY: APY includes compounding effects.
FAQ
What does daily compounding mean?
Interest is calculated and added each day using the daily rate equivalent.
Is daily compounding better than monthly?
It’s typically a bit higher, but the difference is small compared to changes in rate or time.
How big is the difference between monthly and yearly?
For moderate rates and timelines, monthly is slightly higher than yearly; the gap is modest.
What is n in the compound interest formula?
n is how many times per year interest is compounded (e.g., 1, 12, or 365).
Does compounding frequency affect APY?
Yes. More frequent compounding raises the effective annual rate/APY slightly.
How do I model monthly contributions with compounding?
Add monthly deposits and select a compounding frequency; the calculator will apply both.
Why do banks quote APY instead of APR sometimes?
APY shows the effect of compounding, which is helpful for comparing offers with different frequencies.
How do I compare two accounts fairly?
Compare using the same nominal rate, timeframe, and compounding frequency—or compare APY/EAR directly.
Run n=1/12/365 in the tool
Use the same principal, rate, and years, then switch compounding to see the differences.
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