Compound Interest Calculator is a tool which helps you estimate how much money you will save with your deposit or how much your loan will grow within a particular period of time. In order to make a smart financial decision you need to be able to foresee the final results of it. That's why it's worth knowing how to calculate compound interest. The most common real-life application of the compound interest formula is a regular savings calculation.
Read on to find out:
- what compound interest is
- what compound interest formula you can use
- how to calculate compound interest
What compound interest is
First of all, you should get to know what compound interest is and how it differs from simple interest. Only then will it be possible to compare these two options. Compound interest is the interest calculated on the initial principal and the interest which has been accumulated during the consecutive periods as well. This concept of adding carrying charge makes a deposit or loan grow at a faster rate. Simple interest is opposite to compound interest, calculated only on the initial sum of money.
Compound interest formula
The compound interest equation lets you estimate how much you will earn with your savings account. It's quite complex because it takes under consideration not only the annual interest rate and the number of years but also the number of times the interest is compounded per year.
The formula for annual compound interest is as follows:
V = P (1+ r/n)^nt
- V - the future value of the investment
- P - the initial principal
- r - the annual interest rate (in decimal)
- n - the number of times the interest is compounded a year
- t - the numbers of years the money is invested for
Let's take an example:
10 years at the annual interest rate of
5%, compounded monthly.
To count the investment value you need to plug the numbers in the formula:
V = 10000 * (1 + 0.05 / 12) ^ (12 x 10) = 10000 * 1.004167 ^ 120 = 10000 * 1.647 = 16470
How to calculate compound interest
Actually, you don't need to know how to calculate compound interest in order to foresee your future investment value. You can use our Compound Interest Calculator to check it. All you need to do then is type:
- the initial balance, that means the amount of money you are going to invest
- the interest rate (in %)
- the number of years you are going to invest money for
- compound frequency, i.e. if the interest is calculated daily, weekly, monthly, quarterly, half-yearly or yearly
The calculator will estimate your final balance, so that you could see how much you will earn with a particular deposit.
In order to compare bank offers which have different compounding periods, we need to calculate the Annual Percentage Yield, also called Effective Annual Rate (EAR). This value tells us how much profit we will earn within a year. The most comfortable way to figure it out is using the APY Calculator, which estimates the EAR from the interest rate and compounding frequency.
If you want to find out how long it would take for something to increase by n%, you can use our Rule of 72 Calculator. This tool enables you to check how much time you need to double your investment, for example.