How to calculate compound interest
A lot of us are familiar with compound calculators, but we don’t know how to use them to figure out how much interest we’ve earned. Read the article below to learn everything about the stages involved in calculating compound interest, as well as some other fantastic features!
Compound interest
It refers to interest that an investor earned on the principal amount along with the interest earned over some time. It’s the interest earned on the interest accumulated over time. It grows the money faster and allows investors to increase their wealth within a limited compounding frequency.
Benefits of the compound interest
Check on some of the benefits of compound interest below:
- Growth of investments:
This allows you to grow your money at a faster rate in a short period. The interest that you earn over a year adds to the principal amount and on that particular interest, you also earn more interest so that’s an interesting benefit of compound interest.
- Passive Income:
Compound interest increases your wealth without your active involvement. In this way, you don’t need to worry about working and earning money while you sleep. What could be the best thing other than that which doesn’t cost your hard work and efforts?
- Large investment not required:
Compound interest does not require a large investment, you can start investing even if you have a small amount and then see its perks. You can attain your financial goals faster than you have ever imagined.
- Longer time investment:
The more you leave your money invested, the faster it grows. Small amounts can also grow at a faster rate with compounding frequency either monthly or early. The return rate will be extremely higher than that of the principal amount.
Compound interest calculation
Check out the steps below to learn how to calculate compound interest:
- Check out the formula: As there is a particular formula in mathematics to calculate anything, so is the case with compound interest. Its formula is based upon 5 variables (A,p,r,n,t). The formula for it is A= P(1+r/n)^t.
A= final amount
P= initial amount
r= annual interest rate
n= times of compounded interest in a certain time
t= number of years an investor invested money or borrowed.
- Add the values: add proper values in the formula, and make sure not to make any mistakes otherwise, it will lead to error and miscalculation.
- Click on generate result: when you are finally done with putting values recheck it again and click on the generate result button.
- Check out the results: just below the values, you will find an option for the result, check it to know your interest earned. For example, if the interest calculation is of 5 years it will be shown as: Total interest earned: $1516
Final verdict
To sum up, this article comprises information regarding how to calculate compound interest. The calculation of compound interest becomes easy when you follow its proper steps, any incorrect value placed can result in miscalculation or error so check on the above article, go and calculate your interest earned to maximize your investment growth and enjoy investing more.
Frequently Asked Questions
- What are the four variables of compound interest calculation?
The four variables are the final amount, initial amount, annual interest rate, compounded interest period, and number of years of money borrowed.
- Is the compound interest calculator free to use?
Yes, it is free to use.
- What is the principal amount?
It is the initial investment before the interest is earned.