Do you want to learn how much money you may be earning in years to come based on investment? If so feel free to use this online Compound Interest Calculator. Setting aside a certain amount of your money away in the bank that offers compound interest can prove to be very rewarding in the long run. You’ll be amazed at how much your money can generate you through compound interest. Albert Einstein once said that “The most powerful force in the universe or the eighth wonder of the world is the compound interest.”
What is Compound Interest?
Compound interest is the act of investing a certain amount of money over and over again so it builds upon itself. In a very simple term, this means all the money you have invested in the bank saving or other investment earns you interest and then that interest earned plus the amount of the original investments earns more interest. With a compound interest calculator it is easy to determine how a small sum of money can grow to an enormous sum.
Compound Interest Calculator
Compound Interest Calculator Definitions
- Current Principal This is the initial amount of money you wish to invest, also called principal or lump sum
- Monthly deposit / Loan amount This is how much extra money you plan on adding monthly, yearly etc
- Term – This is the number of years you intent to invest (or pay off debt)
- Interest Rate The annual interest rate for your investment
- Compound Frequency Number of times interest is compounded per year
- Compound Interest – Interest on an investment’s interest, plus previous interest.
Basic Equation for Compound Interest Calculator
FV = ic (1 + r/n) nt
FV = future value
ic = initial deposit
r = interest rate (expressed as a fraction: eg. 0.06)
n = # of times per year interest in compounded
t = number of years invested
When interest is only compounded once per yer (n=1), the equation simplifies to:
FV = ic (1 + r) t
Compound Interest Sample
Lets assume you are investing $10,000 as initial deposit, with 5% interest rate, for a 5 year time period, the math would work as follows:
FV = $10,000.00 x (1 + 0.05)5
Formula results by year are as follows:
- Year 1: $10,000. 00 x (1 + 0.05)1 = $10,500.00
- Year 2: $10,500. 00 x (1 + 0.05)2 = $11,025.00
- Year 3: $11,025. 00 x (1 + 0.05)3 = $11,576.25
- Year 4: $11,576.25 x (1 + 0.05)4 = $12,155.06
- Year 5 $12,155.06 x (1 + 0.05)5 = $12,762.82
Then FV – ID = $12,762.82 – $10,000.00 = $2,762.82 (This is the total Interest earned from investment).