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The compound interest calculator is a powerful tool that helps investors calculate and predict the return on their investments with compound interest. Compound interest is the interest you earn not only on your initial deposit, but also on the interest you’ve already earned. It’s a powerhouse that can significantly increase your return on investment over the long term.
How does the compound interest calculator work?
The compound interest calculator uses the following parameters for calculations: starting capital, regular investments, interest rate and number of years. All these data are entered by the user and the calculator makes calculations based on these data.
What is startup capital?
Startup capital is the amount of money you initially invest. It can be any amount, and it will be used as the basis for calculating compound interest in the future.
What are regular investments?
Regular investment is the amount you plan to invest on a regular basis. These can be monthly, quarterly, semi-annual or annual investments. These investments are added to your startup capital and increase your total investment that will earn interest.
What is the rate of interest?
The rate of interest is the interest rate you expect to receive on your investment each year. This could be interest from your bank, dividends from stocks, or income from bonds. This rate is applied to the total amount of your deposit (including previously earned interest) to calculate your annual income.
What is the number of years?
The number of years is the period of time for which you plan to make your investment. The number of years can greatly affect the total amount you earn, thanks to the power of compound interest.
Compound interest and its power
Compound interest is the process where the interest earned on a deposit begins to generate income on its own. Unlike simple interest, where interest accrues only on the principal amount of the deposit, compound interest accrues on the total amount of the deposit, including interest already accrued. This causes your capital to grow much faster.
The compound interest formula
The formula for compound interest looks like this:
A = P (1 + r/n)^(nt)
Where:
- A is the final amount of money after accumulation;
- P is the initial amount of money (start-up capital);
- r — annual interest rate (in decimal fractions);
- n is the number of times interest is accrued during one year;
- t is the contribution time in years.
Example of using the formula
Let’s say you invest $10,000 for 5 years at 5% interest, with interest accruing quarterly. Using the compound interest formula, your contribution would look like this:
A = 10000 * (1 + 0.05/4)^(4*5) = $12834.25
The bottom line is that in 5 years you will have $12834.25.
Compound interest in investments
Compound interest plays a key role in investing. With compound interest, your capital can increase significantly over time. Even a small monthly deposit can turn into a significant amount in a few decades. It’s important to remember that the earlier you start investing, the more you can earn thanks to compound interest.
Technical aspects of compound interest
It’s important to realize that compound interest only works for you if you don’t withdraw the accumulated interest. If you withdraw interest regularly, your capital will grow at the rate of simple interest, which is much less than the rate of compound interest. Therefore, to maximize your income, it is advisable to reinvest the interest earned.
