Compound Interest Calculator
Understanding Compound Interest
Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It's often described as "interest on interest." This powerful concept can significantly accelerate the growth of your investments over time, making it a cornerstone of long-term financial planning.
Unlike simple interest, where interest is only earned on the original principal amount, compound interest allows your earnings to generate their own earnings. This snowball effect means that the longer your money is invested and the more frequently it compounds, the greater the potential for growth.
Key Components of Compound Interest:
- Principal Amount: The initial sum of money you invest or deposit.
- Annual Interest Rate: The percentage of interest you earn per year.
- Compounding Frequency: How often the interest is calculated and added to the principal. Common frequencies include annually (once per year), semi-annually (twice per year), quarterly (four times per year), monthly (12 times per year), and daily (365 times per year). The more frequent the compounding, the faster your money grows.
- Time: The duration for which the money is invested or borrowed.
The Compound Interest Formula:
The future value (FV) of an investment with compound interest is calculated using the following formula:
FV = P (1 + r/n)^(nt)
Where:
- FV = Future Value of the investment/loan, including interest
- P = Principal investment amount (the initial deposit or loan amount)
- r = Annual interest rate (as a decimal)
- n = Number of times that interest is compounded per year
- t = Time the money is invested or borrowed for, in years
How This Calculator Works:
This calculator takes your initial investment (principal), the annual interest rate, how often the interest is compounded per year, and the number of years you plan to invest. It then applies the compound interest formula to show you the total amount you can expect to have at the end of the investment period, including both your initial principal and the accumulated interest.
Example Calculation:
Let's say you invest $10,000 (Principal) at an annual interest rate of 7% (0.07 as a decimal) compounded monthly (n=12) for 15 years (t=15).
FV = 10000 * (1 + 0.07/12)^(12*15)
FV = 10000 * (1 + 0.0058333)^180
FV = 10000 * (1.0058333)^180
FV = 10000 * 2.83956
FV ≈ $28,395.60
In this example, your initial $10,000 would grow to approximately $28,395.60 after 15 years, with over $18,000 of that being compound interest!