How to Calculate Daily Compounding Interest

Compounding interest daily increases your effective rate of return.
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Daily compounding interest refers to when an account adds the interest accrued at the end of each day to the account balance so that it can earn additional interest the next day and even more the next day, and so on. To calculate daily compounding interest, divide the annual interest rate by 365 to calculate the daily rate. Add 1 and raise the result to the number of days interest accrues. Subtract 1 from the result and multiply by the initial balance to calculate the interest earned.

Formula Example

Pretend an account offers 3.65 percent interest per year, compounded daily, and you put $2,500 in the account. Divide 0.0365 by 365 to get 0.0001. Add 1 to 0.0001 to get 1.0001. Raise 1.0001 to the 365th power to get 1.037172411. Subtract 1 from 1.037172411 to get 0.037172411. Finally, multiply 0.037172411 by $2,500 to get $92.93 in interest.