Compound interest is often referred to as "interest on interest." It's a powerful concept that can significantly boost your savings and investments over time. Unlike simple interest, which is calculated only on the initial principal amount, compound interest is calculated on the initial principal *plus* the accumulated interest from previous periods.
How It Works
The magic of compound interest lies in its exponential growth. When interest is earned, it's added back to the principal. In the next period, the interest is calculated on this new, larger principal. This snowball effect means your money grows at an accelerating rate.
The Formula
The formula for calculating compound interest is:
A = P (1 + r/n)^(nt)
Where:
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
Why It Matters for Your Investments
Starting early and investing consistently are key to harnessing the power of compound interest. Even small amounts invested regularly can grow substantially over decades. Understanding how compounding works can motivate you to save more, invest wisely, and be patient with your financial goals.
For example, if you invest $1,000 at an annual interest rate of 5% compounded monthly for 10 years, your initial investment will grow to approximately $1,647.01. The total interest earned would be $647.01. If you were to leave it for 30 years, that same $1,000 could grow to over $4,467.74!
Factors Affecting Compound Interest
Principal Amount: A larger initial investment will naturally yield more interest.
Interest Rate: Higher interest rates lead to faster growth.
Time: The longer your money is invested, the more time compounding has to work its magic.
Compounding Frequency: More frequent compounding (e.g., daily vs. annually) generally results in slightly higher returns due to interest being calculated on accumulated interest more often.
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");
if (isNaN(principal) || isNaN(annualRate) || isNaN(years) || isNaN(compoundingFrequency) || principal < 0 || annualRate < 0 || years < 0 || compoundingFrequency <= 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
var ratePerPeriod = annualRate / 100 / compoundingFrequency;
var numberOfPeriods = years * compoundingFrequency;
var futureValue = principal * Math.pow((1 + ratePerPeriod), numberOfPeriods);
var totalInterestEarned = futureValue – principal;
resultDiv.innerHTML =
"