Compound Interest Calculator
The compound interest formula can be tricky, so we’ve made a simple calculator to help you understand how much money you’ll have after your initial investment.
About Compound Interest
It is impossible to effectively manage finances without possessing a basic understanding of compound interest.
Did you know that this formula was outlawed in Ancient Rome and other countries, labeled as usury based on how quickly it makes an amount, like a debt, grow? It is unavoidable in finance today, but that does not need to be a negative because it can be turned to anyone’s advantage.
Similar to simple interest, the starting point for this formula involves the initial amount invested, or principal, and the interest rate. Unlike simple interest, the amount earned by the compound interest formula is added back into the principal amount, increasing the rate of growth. Furthermore, this can occur more than once a year, and the frequency an interest rate is compounded makes a big difference in the rate of growth.
If an interest rate is added into the principal four times a year, it grows four times faster that it would compounded only once. Even that one time though results in a far faster growth rate than simple interest, which is only calculated based on the initial amount, can achieve.
The compound interest formula underpins an array of financial concepts. For example, home mortgage loans are based on the compound interest formula, as is the debt on a credit card. Money market accounts and CDs are based on compound interest, as well. However, the rate at which they are compounded is not the same. Money market accounts and CDs typically are compounded daily, as is the average savings account. Fortunately, the same cannot be said of a home mortgage or credit card debt, which are generally compounded on a monthly basis.
For the calculator above, we’ve provided a result using monthly compounding, but look for new calculators over time. If you’re interested in seeing what would happen if you keep adding more funds each month, you can use our compound interest calculator with additional deposits.
The importance of the compound interest formula is clear to most and it is relatively easy to understand in this basic form, especially if you do not need to do the math yourself.