How Do You Calculate Interest Rate on a Credit Card – Cost Calculator

Compound Interest Calculator

Principal Amount ($):

Annual Interest Rate (%):

Compounding Frequency (per year):

Time (in years):

Understanding Compound Interest

Compound interest is often referred to as "interest on interest." It's a powerful concept in finance that allows your money to grow exponentially over time. Unlike simple interest, which is calculated only on the initial principal amount, compound interest is calculated on the initial principal plus any accumulated interest from previous periods.

How it Works

The magic of compound interest lies in its reinvestment. When interest is earned, it's added to the principal. In the next compounding period, the interest is calculated on this new, larger sum. This cycle repeats, leading to a snowball effect where your earnings start generating their own earnings.

The Compound Interest Formula

The formula used to calculate 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

Compound interest is fundamental to long-term investing and wealth building. Whether you're saving for retirement, investing in stocks, or even taking out a loan, understanding how compounding works can help you make informed financial decisions. For investors, it means starting early can lead to significantly greater returns. For borrowers, it highlights the importance of paying down debt quickly to minimize the total interest paid.

Example Calculation

Let's say you invest $10,000 (Principal) at an annual interest rate of 7% (0.07 as a decimal) compounded monthly (12 times per year) for 20 years.

P = $10,000
r = 0.07
n = 12
t = 20

Using the formula:

A = 10000 * (1 + 0.07/12)^(12*20)

A = 10000 * (1 + 0.0058333)^240

A = 10000 * (1.0058333)^240

A = 10000 * 4.0387

A ≈ $40,387

After 20 years, your initial investment of $10,000 would have grown to approximately $40,387 due to the power of compounding interest.

function calculateCompoundInterest() { var principal = parseFloat(document.getElementById("principal").value); var annualInterestRate = parseFloat(document.getElementById("annualInterestRate").value); var compoundingFrequency = parseFloat(document.getElementById("compoundingFrequency").value); var timeInYears = parseFloat(document.getElementById("timeInYears").value); var resultElement = document.getElementById("result"); resultElement.innerHTML = ""; // Clear previous results if (isNaN(principal) || isNaN(annualInterestRate) || isNaN(compoundingFrequency) || isNaN(timeInYears) || principal <= 0 || annualInterestRate <= 0 || compoundingFrequency <= 0 || timeInYears <= 0) { resultElement.innerHTML = "Please enter valid positive numbers for all fields."; return; } var ratePerPeriod = annualInterestRate / 100 / compoundingFrequency; var numberOfPeriods = compoundingFrequency * timeInYears; var futureValue = principal * Math.pow((1 + ratePerPeriod), numberOfPeriods); var totalInterestEarned = futureValue – principal; resultElement.innerHTML = "Total Amount (Principal + Interest): $" + futureValue.toFixed(2) + "" + "Total Interest Earned: $" + totalInterestEarned.toFixed(2) + ""; }