How To Calculate Compound Interest?
Our Compound Interest calculator helps you to calculate compound interest with ease and efficiency. It works based on the initial data you provide. This data includes the Principal Amount (the initial amount that you have invested), Annual Interest Rate (which the investee offers), and the compound frequency (if it is annual/ bi-annual or semi-annual). It also takes additional data, like Years of Growth (which is the time for which this compound interest adds up), the Payment, and Payment Frequency.
This Compound Interest Calculator is part of our series on financial calculators, which include Return on Investment Calculators, College Savings Calculator, and others. You can check out the full list by clicking here.
Let us take a more in-depth look at how compound interest is calculated, which is the underlying principle behind this calculator.
Principal/ Start Amount
This amount is one that you start with as your investment. The higher your initial principal Amount, the more your interest would be, irrespective of the interest rate. Moreover, in some situations, having a higher principal Amount can fetch you a higher interest rate package, so that’s also worth keeping in mind before investing.
Annual Interest Rate
This amount is the money you make annually as a percentage of your initial investment amount or your principal amount. Let’s say, for example, that your initial principal amount is $1000. Let us assume that the Compound Frequency is annual. Then, if you have an Annual Interest Rate of 5%, this means that after the first year, you’ll end up having an interest amount of $50. Also, the higher your interest rate, the higher your earnings over time.
Compound Frequency
Compound Frequency is the “refresh rate” of how often your interest gets compounded. In the previous example, if the Compound Frequency was bi-annual instead of annual, then this means that you’d earn $50 at the end of two years instead of one year.
An interesting thing to keep in mind is the workings of compound interest. On the surface, a 5% annual interest rate might sound like a 10% interest compounded bi-annually. However, at the end of the first year, the 5% interest you’ve received will be carried on to the compound interest calculation for the next year, meaning that a 5% annual compound interest will give you more money over time.
Years Of Growth
This period is the duration you let your Principal amount give you interest. It’s pretty straight forward; the longer the years of growth, the larger your profits would be over the duration. An important thing to keep in mind is that with the way compound interest works, your annual interest amount slowly starts to build up over time, meaning that every following year would give more of a return in the long run.
Payment
This is the amount that you pay, which adds to your Principal Interest. However, it is worth noting that you have to wait until next year for this current payment to get compounded.
Let us use the previous example of $1000 principal amount, with an annual interest of 10 percent. Now let’s assume that we pay $100 every year. After the first year, the interest would be $100. At the end of the first year, however, we add an amount of $100, making our total amount to $1200. This addition means that the interest you’ll be receiving for the second year will be $120, summing up to a total of $220 total interest.
Payment Frequency
Payment Frequency is the frequency of additional payments. These get added up cumulatively to your initial principal amount. Usually, this frequency is the same as the interest frequency. However, if it were the contrary, we can visualize this with the previous example.
If you were to pay $100 every six months instead of a year (with compounding frequency to be per year), it would be the same as paying $200 per year to your initial principal amount.
What Information Do You Get?
Future Value
The calculator gives your total value after the calculator accounts for all the compound interest calculations. Moreover, these can provide a bigger perspective on the amount that you’re receiving after your investment.
Interest Amount
This column will show the exact amount that you make at the end of the calculation. Moreover, these numbers can help you visualize the total amount you’ll be making after your investment.
Conclusion
This calculator makes sure that your compound interest calculations will be a breeze to calculate and analyze. With this accurate data in your hands, you can make an informed decision about your future investments.