Our compound interest calculator can help determine how an initial amount of money, known as the principal, will grow over time when it earns interest that is compounded at regular intervals.
Page written by Ian Hawkins. Last reviewed on July 17, 2024. Next review due April 1, 2025.
This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.
Compound interest is earned not only on the initial principal amount invested but also on the accumulated interest from previous periods. In essence, it’s interest on interest, leading to exponential growth of your savings or investment over time.
The formula for calculating compound interest is A = P(1 + r/n)^(nt)
Where:
A = the future value of the investment/loan, including interest
P = the principal amount (initial investment or loan amount)
r = the annual interest rate (in decimal)
n = the number of times that interest is compounded per year
t = the time the money is invested/borrowed for, in years
Example: Let’s say you invest $1,000 in a savings account with an annual interest rate of 5%, compounded monthly (n = 12) and, and you plan to keep the money invested for 3 years. Using the compound interest formula:
A = 1000(1 + 0.05/12)^(12*3)
A = 1000(1 + 0.004167)^(36)
A = 1000(1.004167)^(36)
A ≈ 1000(1.161155)
A ≈ $1,161.16
So, after 3 years, your investment of $1,000 would grow to approximately $1,161.16, thanks to compound interest.
Our calculator requires you to input the initial amount (principal), the interest rate, the number of times interest is compounded per year, and the time period for which the interest will be calculated. With this information, the calculator can provide you with an estimate of the final amount that will be accrued.
This tool is particularly useful for individuals, investors, and financial professionals to plan and strategise for savings, investments, business loans, and other financial endeavours. It enables one to see how different interest rates and compounding frequencies can impact the growth of their money over time.
Understanding the difference between compound interest and simple interest is crucial for managing finances effectively. Here’s a clear breakdown:
Simple Interest: Simple interest is calculated only on the principal amount of a loan or deposit. It remains constant throughout the specified period, and interest is not earned on previously accumulated interest.
Example: If you invest $1,000 at a simple interest rate of 5% per year for 3 years, the interest earned each year is calculated on the initial $1,000 principal. At the end of each year, you earn $50 (5% of $1,000).
Total Interest Earned: Total Interest=Principal×Rate×Time
Total Interest=$1,000×0.05×3=$150
Compound Interest: Compound interest, on the other hand, calculates interest on both the initial principal and the accumulated interest from previous periods. Over time, this leads to exponential growth of your investment or debt.
Example: Using the same $1,000 principal and 5% interest rate, compounded annually for 3 years:
Total Amount After 3 Years: Total Amount=Principal×(1+Rate)Time
Total Amount=$1,000×(1+0.05)3=$1,157.63
Compound interest can be a powerful tool for building wealth over time. Here’s how you can make the most of it:
Start early: The earlier you start investing, the longer your money has to grow. Even small amounts can accumulate significantly over time due to compounding.
Consistent contributions: Regularly adding to your investments or savings accelerates compound growth. Set up automatic contributions to maximize returns.
Long-term perspective: Compound interest benefits from time. Invest with a long-term view to allow your money to grow exponentially.
Diversification: Spread investments across different assets to manage risk and potentially enhance returns. Consider stocks, bonds, mutual funds, and other investment vehicles.
Reinvest earnings: Reinvesting dividends and interest earned allows your investments to compound faster, further boosting returns.
By understanding and harnessing the power of compound interest, you can build a solid financial foundation and achieve your long-term financial goals.
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