Compound Interest Calculator
A compound interest calculator is an online tool that calculates and displays the compound interest for a given amount. The free compound interest calculator tool on this page performs the calculation speedily and accurately, and displays the compound interest within seconds. You can use it to calculate the possible growth of your savings and investments over time.
Before we learn how to use the calculator, let us discuss what compound interest is and how it can help you reach your financial goals.
Table of Contents
What is compound interest?
The fundamental concept of compound interest (also known as “’interest on interest”) is that the accumulated interest is added back onto your principal sum. Thereafter, all future interest calculations are made on both the original principal and the already-accrued interest.
By combining the power of interest compounding with regular, consistent investing over a sustained period of time, you will have a highly effective growth strategy at hand for accelerating the long-term value of your savings or investments.
Here’s what Warren Buffett, one of the world’s most successful investors, has to say about the importance of compound interest:
My wealth has come from a combination of living in America, some lucky genes, and compound interest.
Warren Buffett
To fully appreciate the significance of compound interest, let us break down the interest compounding by year with a realistic example scenario. Suppose you have USD 10,000 in a savings account earning 5% interest per year, with annual compounding. Let’s assume you wish to leave that investment untouched for 20 years. In that case, your investment projection will look something like this:
| Year | Interest Calculation | Interest Earned | End Balance |
|---|---|---|---|
| Year 1 | $10,000 x 5% | $500 | $10,500 |
| Year 2 | $10,500 x 5% | $525 | $11,025 |
| Year 3 | $11,025 x 5% | $551.81 | $11,576.25 |
| Year 4 | $11,576.25 x 5% | $578.81 | $12,155.06 |
| Year 5 | $12,155.06 x 5% | $607.75 | $12,762.82 |
| Year 6 | $12,762.82 x 5% | $638.14 | $13,400.96 |
| Year 7 | $13,400.96 x 5% | $670.05 | $14,071 |
| Year 8 | $14,071 x 5% | $703.55 | $14,774.55 |
| Year 9 | $14,774.55 x 5% | $738.73 | $15,513.28 |
| Year 10 | $15,513.28 x 5% | $775.66 | $16,288.95 |
| Year 11 | $16,288.95 x 5% | $814.45 | $17,103.39 |
| Year 12 | $17,103.39 x 5% | $855.17 | $17,958.56 |
| Year 13 | $17,958.56 x 5% | $897.93 | $18,856.49 |
| Year 14 | $18,856.49 x 5% | $942.82 | $19,799.32 |
| Year 15 | $19,799.32 x 5% | $989.97 | $20,789.28 |
| Year 16 | $20,789.28 x 5% | $1,039.46 | $21,828.75 |
| Year 17 | $21,828.75 x 5% | $1,091.44 | $22,920.18 |
| Year 18 | $22,920.18 x 5% | $1,146.01 | $24,066.19 |
| Year 19 | $24,066.19 x 5% | $1,203.31 | $25,269.50 |
| Year 20 | $25,269.50 x 5% | $1,263.48 | $26,532.98 |
Thus, you can see that USD 10,000 when invested at a fixed 5% yearly interest rate, compounded yearly, will grow to USD 26,532.98 after 20 years. It implies a total interest of USD 16,532.98 and a return on investment of 165%.
It’s important to mention that we’ve assumed a fixed percentage yearly interest rate in these example calculations. If you decide to invest your money instead of saving it in fixed rate accounts, the reality is that returns on investments will vary every year because of fluctuations that economic factors cause.
Therefore, industry experts widely recommend the risk management strategy of diversification.
Compounding with additional deposits
Many people prefer to combine interest compounding with regular deposits into their savings account, SIP, Roth IRA, or 401(k). It is a highly efficient saving strategy that can significantly boost the your money’s growth in the longer term.
Revisiting the above example, if you chose to contribute an additional USD100 per month into your investment, your balance after 20 years would grow up to a whopping USD 67,121, with an interest of USD 33,121, on a total deposit of USD 34,000.
Eminent financial institutions rightly point out that if people start making regular investment contributions early on in their lives, they’re likely to witness a significant growth in their savings later as their interest snowball becomes larger and they gain from Dollar-cost or Pound-cost averaging.
How to calculate compound interest?
We can calculate compound interest by using the standard compound interest formula:
$$ A = P (1+ \dfrac{r}{n})^{nt} $$
For annual compounding, you need to multiply the initial balance by one plus your annual interest rate raised to the power of the number of time periods (years). Doing so gives you a combined figure for the principal and the compound interest.
Let us look at the individual components of the compound interest formula:
- A = the future value of the investment
- P = the principal balance
- r = the annual interest rate in decimal. For example, 5% will be 1/20 or 0.05.
- n = number of times interest is compounded per year
- t = the time in years
Now since the compound interest = Future Value – Principal Balance = A – P
The compound interest here will be:
$$ CI = P (1+ \dfrac{r}{n})^{nt} – P $$
Now, if the interest rate is compound only once per year, you can also use this formula:
$ A = P (1+ \dfrac{r}{100})^{t} $
Here the value of r is put in numerical format, which is 5 for 5%, 10 for 10% etc.
How to calculate your monthly compound interest using the formula
Your monthly compound interest implies that your interest is compounded 12 times per year. Therefore, you can calculate your monthly compound interest using the aforementioned compound interest formula by following the steps below:
1. Divide your annual interest rate (decimal) by 12 and proceed to add 1 to it.
2. Raise the resulting figure to the power of the number of years multiplied by 12.
3. Multiply the result of step 2 by your principal balance (P).
4. Deduct the principal balance from the result of step 3 if you require only the interest.
The actual formula looks like this:
$ A = P (1+ \dfrac{r}{12})^{12 \times t} $
How to use the compound interest calculator
With the compound interest calculator, you can easily calculate the interest you might earn on your savings or investment over a period of years and months. It saves you the hassle of memorizing cumbersome formulae and helps you avoid calculation errors by providing a highly accurate result within seconds.
The calculator is very easy to use; you just need to enter three inputs to get your total interest amount — the principal invested, the rate of interest earned, and the holding period of the investment.
Once you enter all three variables in the calculator, it will automatically calculate the total gains and total corpus that you will accumulate by the end of the tenure. If you have a specific target corpus in mind, you can adjust the interest rate or the principal to see what effect it has on the maturity value.
Conclusion
The compound interest calculator is a simple, accurate, and fast way of computing compound interest. I hope it helps you effectively monitor your investments and make greater savings in the coming years.
