Compound Interest Calculator
What is Compound Interest?
Compound interest is defined as interest earned not only on the initial amount invested but also on any further interest. Simply put, compound interest is the interest on the initial principle and the interest which has been accrued on this principle to date. A fundamental characteristic of compound interest is that interest itself earns interest. This concept of adding carrying charge makes a deposit or loan's growth accelerate.
The most prevalent real-life application of the compound interest formula is a regular savings calculation where you add a certain amount to the initial deposit periodically, and the interest is calculated on the new total.
How to Use a Compound Interest Calculator?
The compound interest calculator allows you to calculate compound interest without actually having to memorize the formula. The calculator requires you to fill in several fields including:
Initial balance: This is the amount of money you are going to invest or deposit.
Interest rate: This is the interest rate expressed on a yearly basis.
Term: This refers to the time frame in which you plan to invest the money.
Compounding frequency: In this field, you select how often the compounding applies to your balance. The frequencies could be daily, weekly, monthly, quarterly, semi-annually, or yearly. You can also select continuous compounding, which is the theoretical limit for the compounding frequency.
Additionally, if you are planning to make additional deposits, you will also need to specify the following:
Deposit amount: This is the amount planning to deposit on the account.
Frequency of deposit: Here, you specify how often you'll be making the additional deposit.
Deposit timing: This allows you to choose whether you want to make the additional deposit at the beginning or at the end of the period.
Growth rate of deposit: This setting lets you set a growth rate for the additional deposit. This can be useful in the long term when you expect your income to increase because of factors like inflation and promotions.
An Actual Example to Demonstrate the Calculator
Assume that you want to invest $10,000 for 10 years at an annual interest rate of 5%. Assume also that the interest rate is compounded yearly. Using the compound interest calculator, you would set your initial balance as $10,000, the interest rate as 5%, the term as 10 years, and the compounding frequency as yearly.
Plugging in the figures and calculating gives us a final balance of $16,288.95. Simply speaking, the value of your investment after the specified 10 years will be $16,288.95. So, your profit from this investment will be the difference between the final value and your initial deposit, which is $6,288.95.