Understanding Compound Interest
Compound interest is often called the "eighth wonder of the world." It's the process where interest earned on an investment or loan is added to the principal amount, and then subsequent interest is calculated on this new, larger principal. This snowball effect can significantly boost your returns over time.
How It Works
Unlike simple interest, which is only calculated on the initial principal, compound interest calculates interest on the principal plus any accumulated interest. The more frequently interest is compounded, the faster your investment grows.
The Formula
The future value (FV) of an investment with compound interest can be calculated using the following formula:
FV = P (1 + r/n)^(nt)
Where:
- P = Principal amount (the initial amount of money)
- r = Annual interest rate (as a decimal)
- n = Number of times that interest is compounded per year
- t = Number of years the money is invested or borrowed for
Calculator Inputs Explained
- Initial Investment ($): This is the starting amount of money you are investing.
- Annual Interest Rate (%): This is the percentage of interest you expect to earn per year on your investment. Remember to input it as a percentage (e.g., 5 for 5%).
- Number of Years: This is the duration for which your investment will grow with compound interest.
- Compounding Frequency: This indicates how often the interest is calculated and added to the principal. Common frequencies include annually (once a year), semi-annually (twice a year), quarterly (four times a year), monthly (12 times a year), and daily (365 times a year). A higher compounding frequency generally leads to greater returns over time.
Use this calculator to see how your investment can grow through the power of compounding!
function calculateCompoundInterest() {
var principal = parseFloat(document.getElementById("principal").value);
var annualRate = parseFloat(document.getElementById("annualRate").value);
var years = parseFloat(document.getElementById("years").value);
var compoundingFrequency = parseInt(document.getElementById("compoundingFrequency").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(principal) || principal <= 0) {
resultDiv.innerHTML = "Please enter a valid positive initial investment.";
return;
}
if (isNaN(annualRate) || annualRate < 0) {
resultDiv.innerHTML = "Please enter a valid non-negative annual interest rate.";
return;
}
if (isNaN(years) || years <= 0) {
resultDiv.innerHTML = "Please enter a valid positive number of years.";
return;
}
if (isNaN(compoundingFrequency) || compoundingFrequency <= 0) {
resultDiv.innerHTML = "Please select a valid compounding frequency.";
return;
}
var ratePerPeriod = (annualRate / 100) / compoundingFrequency;
var numberOfPeriods = years * compoundingFrequency;
var futureValue = principal * Math.pow((1 + ratePerPeriod), numberOfPeriods);
var totalInterestEarned = futureValue – principal;
resultDiv.innerHTML =
"
Future Value: $" + futureValue.toFixed(2) + "" +
"
Total Interest Earned: $" + totalInterestEarned.toFixed(2) + "";
}
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