Tally.au

How the Effective Annual Rate Calculator Works (With a Worked Example)

Updated 9 May 2026 · Savings and investing

Converts a nominal interest rate into an effective annual rate. This guide walks through what each input means, the formula behind the answer and a worked example using typical Australian figures. You can follow along in the free Effective Annual Rate Calculator.

Why it matters

Australians save and invest through bank accounts, term deposits, shares, ETFs and property. Interest and dividends are taxable, franking credits can offset tax on dividends, and inflation steadily reduces the value of money that isn’t growing.

What you need to enter

The calculator asks for 2 inputs. The table shows each one with the example value used later in this guide.

InputExample value
Nominal annual rate (%)5
Compounding periods per year12

The formula

Effective rate = (1 + nominal ÷ periods)^periods − 1.

Worked example

Entering the example values above gives these results:

ResultValue
Effective annual rate5.116%

The headline figure is 5.116% (effective annual rate). Change any input in the calculator and every result updates instantly, so you can test different scenarios side by side.

How the effective annual rate changes with nominal annual rate

The table below keeps every other input at the example value and moves only “Nominal annual rate (%)” up and down by 10% and 20%. It shows how sensitive the effective annual rate is to that one figure.

Nominal annual rate (%)Effective annual rate
44.074%
55.116%
66.168%

At 4 the result is 4.074%; at 6 it is 6.168%. If a small change in this input moves the answer a lot, it is worth double-checking that figure before you rely on the result.

A practical tip

Use the effective rate to compare accounts that compound monthly with ones that pay interest yearly.

Keep going

Before relying on the number, read Getting the Most From a Effective Annual Rate Calculator: Tips and Common Errors. You might also find these guides useful:

Frequently asked questions

Are investment returns guaranteed?
Only some products, such as term deposits, have fixed rates. Share and fund returns vary and can be negative.
Is my bank deposit protected?
The Financial Claims Scheme guarantees deposits up to $250,000 per account holder per authorised bank.
Is this investment advice?
No. The calculators provide general information only.

Run your own numbers in the Effective Annual Rate Calculator.

Open the calculator

General information only. Rates and thresholds change, usually on 1 July. Confirm current figures with the ATO or the relevant authority, and get personal advice for decisions about your situation.