Compound Interest Calculator
Calculation Results:
" + "Future Value: $" + futureValue.toFixed(2) + "" + "Total Interest Earned: $" + totalInterestEarned.toFixed(2) + ""; }Understanding Compound Interest
Compound interest is often referred to as "interest on interest." It's a powerful concept in finance where the interest earned on an investment is added to the principal amount. In the next period, interest is then calculated on this new, larger principal, leading to exponential growth over time. This contrasts with simple interest, where interest is only calculated on the initial principal amount.
How Compound Interest Works
The core of compound interest lies in the reinvestment of earnings. When interest is compounded, it becomes part of the capital on which future interest is computed. The formula used to calculate compound interest is:
A = P (1 + r/n)^(nt)
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (the initial deposit or loan amount)
- r = the annual interest rate (as a decimal)
- n = the number of times that interest is compounded per year
- t = the number of years the money is invested or borrowed for
Our calculator simplifies this by allowing you to input the annual interest rate as a percentage and select the compounding frequency from common options like annually, semi-annually, quarterly, monthly, or daily.
Why Compound Interest Matters
Compound interest is a cornerstone of long-term investing and wealth building. The earlier you start investing and the longer your money compounds, the more significant the growth potential. Even small amounts invested regularly can grow substantially over decades due to the snowball effect of compounding.
It also plays a crucial role in understanding loans. When you borrow money, compound interest can cause the amount you owe to grow rapidly if not paid down efficiently, especially with high interest rates or long repayment periods.
Example Calculation
Let's say you invest $5,000 (P) with an annual interest rate of 7% (r = 0.07). You plan to leave it invested for 20 years (t). If the interest is compounded monthly (n = 12), the calculation would be:
- Rate per period (r/n): 0.07 / 12 ≈ 0.005833
- Number of periods (nt): 12 * 20 = 240
- Future Value (A) = 5000 * (1 + 0.005833)^240
- Future Value (A) ≈ 5000 * (1.005833)^240
- Future Value (A) ≈ 5000 * 4.0387 ≈ $20,193.50
In this scenario, your initial $5,000 investment would grow to approximately $20,193.50 after 20 years, meaning you would have earned roughly $15,193.50 in interest. This illustrates the powerful effect of compounding over a long period.
Use the calculator above to explore different scenarios and see how your investments can grow with the magic of compound interest!