Before you make any investment, you may want to know what the future value of that money will be. The best way to determine the future value of your investment is by using our compound interest calculator.
How to Use the Compound Interest Calculator
To use the calculator, you start by inputting your principal investment amount. It can be anywhere from $1 to $1,000,000. Then, input the annual interest rate of your investment into the calculator. Finally, input the number of years you plan on investing into the calculator and press calculate.
The compound interest calculator will then show you how much your investment will be worth (see also personal net worth) at the end of your loan term. The graph at the bottom of the calculator will also show you how much you could make if your principal amount is earning compound interest daily, monthly, quarterly, as well as per year.
The report at the top of the calculator will break down your earnings per year as well to help you see the details of your compound interest. You can print the report the calculator provides to help you budget and plan financially.
Regardless of the amount, the calculator will show you that compound interest earned daily will earn the most in the end. Compound interest per year, however, will still help you earn a great amount.
How Compound Interest Works
Compound interest is when you earn interest on the principal amount that you invested. Then, the same interest rate applies to your new principal amount. It is thus called compound interest because you are earning interest on interest. Compound interest differs from simple interest, which is interest paid on the principal amount only.
If you want to calculate compound interest without our calculator, this is the compound interest formula:
A = P(1+r/n)nt
P stands for the principal amount. r is the annual interest rate as a decimal. n is the number of times the interest will compound (i.e. 12 times if it’s monthly). t is the total number of years. A is the balance you end up with.
Let’s take a look at how a compound interest formula can be used. If you invested $10 into an investment (such as a savings account) that offers an annual rate of 1%, by the end of the year, you would have $11. In the second year, you will then earn interest on the $11 rather than the principal amount of $10. So, at the end of the second year, you would have $12.1 and so on.
If the compound interest formula confuses you, simply use our free calculator. The compound interest calculator will provide you with the same answer.
How Compound Interest Works in Investing
Compound interest can either work in your favour or not. If you take out a loan that charges compound interest rather than simple interest, you will end up paying much more and may need to consolidate your debt. If you are earning compound interest on your investments, however, you will benefit.
There are a variety of investments you could make that earn compound interest rates. For example, GICs, savings accounts, rental properties, stocks, and bonds. Once you deposit money into an investment that earns a compound interest rate, your balance will grow exponentially without you even needing to touch it. The longer the investment, the more chance you have to take advantage of the compound interest rate.
The Bottom Line
Many people shy away when they see a rate of interest. This is because that rate is typically associated with loans (see auto loan calculator). But, when it comes to investing, a high rate of interest is a good thing, especially if you are earning compound interest.
As we discussed, compound interest is when you earn interest on your principal investment as well as the earnings you’ve received. So, you are earning a rate of interest on your interest.
If you are interested in investing in something like a savings account, stocks, bonds, etc. you likely want to know what your earning potential could be. Use our free calculator now to find out! Input all of your basic investment information into the calculator, and it will show you your total earnings. As the calculator is free and easy to use, you’ve got nothing to lose!