Compound Interest Calculator

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If you are the breadwinner in your family or have a lot to do with your family’s finances, then you will probably require a compound interest calculator at some point. With such a tool, you can work out earning potential on a deposit, mortgage growth, and foresee growth to make smarter financial choices. 

If you want to learn more about interest rates, compound interest, the compound interest formula and how to calculate compound interest, then read on.

The Definition of Interest Rates

You can define interest rates as a fee on money you borrowed to buy assets. The fee is a percentage of the loan amount, and for the person who lent it to you, it’s their rate of return. 

You can also determine interest rates as something you earn when you put money into a savings account. Your bank uses that money, and you gain back extra for the privilege. In essence, you make a profit by storing your money in a bank account.

The Definition of Compound Interest

Now that you know what regular interest is, you can now grasp the concept of compound interest a little better. Compound interest is what you earn on a sum of money invested interest already earned. Basically, compound interest is additional interest on both the principal and what you are already making. The more you invest, the more interest and compound interest you receive. 

If you use a compound interest equation, you can work out your investment’s value at a particular time as well as the rate when you are buying and selling assets. Such a comparison can also help you to calculate the doubling timeframe of your investment.

Compound Interest vs. Simple Interest

As you now know, interest is something you get or pay based on a percentage of the principal sum of money. Compound interest is the interest you earn on the principal and interest already earned.

Compounding Frequency

You can describe compounding frequency as how often your interest compounds in a year. It’s when your bank or financial provider adds interest to your principal amount. If that doesn’t make sense, then you can break it down into three forms of compounding - annual, quarterly, and monthly. 

Annual compounding is when you earn interest once per year, quarterly is every three months, and monthly is once per month. The higher the compounding frequency, the higher your final balance will be.

The Compound Interest Formula

Do you want to know how much you can earn with your savings account? You are going to need to know the compound interest formula which lets you estimate it.

The formula takes into consideration your annual interest rate, the timeframe, and how often you compound your interest. The formula looks like this: 

FV = P (1+ r/m)^mt

FV = Future value of your investment (also known as the final balance) 
P = Initial balance (investment value) 
R = Interest rate (in decimal form) 
M = How many times you compound your interest (compounding frequency) 
T = For how long you have been investing your money

When the compounding period is one year (M = 1), the interest rate (R) is the compound annual growth rate (also called CAGR).

How do You Calculate Compound Interest?

Even though the formula above can help you to calculate your compound interest, it’s unlikely you will ever need to use it. Fortunately, the compound interest calculator can take care of everything relating to this financial topic. It also works quickly, giving you more time to do the things you enjoy doing! 

The calculator offers several form fields to fill in so it can provide the most exact answer possible. These include the initial balance, interest rate, the years you have been investing, and the compound frequency.

Therefore, all you need to know is the amount of money you are investing, the yearly interest rate you will earn, the period you will be investing, and how often you compound your interest - be it monthly, quarterly, yearly, or another frequency.

Once you enter that information, you get the results almost immediately in the final field balance.

Examples of Compound Interest

Without real-life examples, it can be hard to understand how compound interest works. You may not even understand how to calculate your compound interest rate or how the calculator works. Therefore, you may find the following examples of use in your financial situation.

A Basic Compound Interest Calculation

In this example, we will show you how to calculate your initial investment’s future value. 

Let’s say you invest $5,000 for five years with an interest rate of two percent (2%). Your interest is compounded yearly. After five years, what will your investment’s value be?

You now need to add the data you have into the formula. Your investment is $5,000, which forms your initial balance of P. You are going to invest for five years, and your interest rate (R) is 2%. As your compound interest is yearly, M is equal to one. 

We want to find out how much your initial investment is worth as a future value (FV), so the formula will look like this:

FV = 5,000 x (1 + 0.02/1) ^ (1 x 5) = $5,520.40

When you are calculating your compounding interest, pay attention to how often you are rounding. With too much rounding, your final predictions might not be correct.

A Challenging Compound Interest Example

In this example, we look at an initial investment’s future value when the interest is compounded every month.

Your $5,000 investment has an interest rate of 2% with monthly compounded interest. After five years, how much will your initial investment be worth?  

Once again, you need to highlight the critical data in the problem. Your initial balance (P) is $5,000, and you are going to invest your money for five years. The interest rate (R) is 2% with a compounding frequency (M) of 12. You need to find the future value or FV. 

FV = 5,000 x (1 + 0.02/12) ^ (5x12) = $5,525.39

An Example of Calculating the Doubling Time of Compound Interest

Those examples above were merely the tip of the iceberg. You can also use the compound interest formula with basic algebra too. This time, we’ll identify the initial and final balance, how long you invested for, and the compounding frequency.

However, you don’t know the interest rate - which is common in a situation such as buying or selling an asset you want to use as an investment. 

Let’s say you purchased a collectible figurine for $5,000 and then went on to sell it for $8,000. What was the annual rate you earned on your investment?

As you did with the two previous examples, work out the values and insert them into the formula.

You have P as $5,000, your final value (FV) as $8,000, and your time period of three years. The frequency of compounding was one, and you don’t have R, the interest rate.

5,000 = 8,000 x (1 + r / 1) ^ (3 x 1)  

8,000 = 5,000 x (1 + r) ^ (3)

Find the interest rate by dividing both sides by 2,000.

8,000 / 5,000 = (1 + r) ^ (3)

Raise them to the 1/6th power.

(8,000 / 5,000) ^ (1 / 3) = (1 + r)

Take one from both sides.

(8,000 / 5,000) ^ (1 / 3) - 1 = r
You are now ready to identify the missing interest rate, which you can get by using the compound interest calculator. 

As you can see, finding the interest rate without the use of a compound interest calculator is no easy task. It takes several steps and can mean it’s in your best interests to use the compound interest calculator to take all the hard work out of it.

Example of Calculating the Doubling Time of Your Investment

If you consider yourself to be investment savvy, then you may have wondered how long it will take you to double your money. The compound interest calculator can calculate this for you, among many other things. We’ve included an example of how this works below. 

You put $100 into a savings account that Grandma gave you for your birthday. Your interest rate is 5% and compounds yearly. Your goal is to find out how many years it will take to double your money.

The initial balance (P) is $100, and your FV, final balance is 2 x 100 = $200. The interest rate (R) is 5%, the frequency of computing is one, and the time period (t) is unknown. 

FV = P (1 + r/m) ^mt 
M = 1
R = 5 
FV = 2 x P 

2P = P (1 + 0.05) ^ t 
2P = P (1.05) ^ t

Now, divide both sides by P.

2 = 1.05 ^ t

If you are going to solve t, take the natural log from both sides to get:

ln (2) = t x ln (1.05) 

T = ln (2) / ln (1.05)

You can now use the compound interest calculator to find out the answer.

Compound Interest Table

Before computers, calculators, and spreadsheets existed, people used compound interest tables to work out their investments and earnings. Even though the compound interest table looks complicated, it was the compound interest calculator of the day. They made the process far quicker than working it out by hand. 

With the right data in the table, you can calculate the final balance of your investment merely by multiplying the initial balance by the data in the table. There are several variations of the compound interest table, with some more complex than others. Some tend to include more interest rates, time periods, and compounding frequencies and are dozens of pages long. 

If you are curious about compound interest tables, then check them out for yourself. Seeing them in person will make you grateful for having a seamless, lightning-quick tool such as the compound interest calculator.

What Else You Need to Know

Even though you use a calculator a lot in mathematics classes, you also use one for financial reasons too. Did you know that a compound interest calculator is merely the tip of the iceberg? 

You can calculate your tax obligations with a tax calculator, work out inflation levels with an inflation calculator, and work out standard interest with an interest calculator as well. These tasks that would previously take hours are now achievable in mere minutes.

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