Compound Interest Calculator

What is Compound Interest?

Compound interest is the interest earned on both the initial principal and the accumulated interest from previous periods. It's a powerful financial concept that allows investments to grow exponentially over time, as interest is earned on interest.

This calculator helps you understand how your investments can grow through the power of compound interest, taking into account your initial investment, interest rate, time period, and compounding frequency.

Compound Interest Formulas

The primary formula used in compound interest calculations is:

Compound Interest Formula

A = P(1 + r/n)^(nt)

Where:

• A = Final amount
• P = Principal (initial investment)
• r = Annual interest rate (as a decimal)
• n = Number of times interest is compounded per year
• t = Time period in years

Total Interest Formula

Total Interest = A - P

How to Calculate Compound Interest: Example

Let's walk through a step-by-step example:

Example Scenario

Suppose you invest $10,000 at an annual interest rate of 5%, compounded monthly for 10 years.

1. Convert the annual interest rate to a decimal:
   5% = 0.05
2. Determine the number of compounding periods per year:
   Monthly compounding = 12 periods per year
3. Apply the compound interest formula:
   A = $10,000(1 + 0.05/12)^(12 × 10)
   A = $10,000(1.004167)^120
   A = $16,470.09
4. Calculate the total interest earned:
   Total Interest = $16,470.09 - $10,000
   Total Interest = $6,470.09

Common Applications

Compound interest calculations are essential for various financial planning scenarios:

• Long-term Investments: Understanding how investments grow over time helps in retirement planning and wealth building.
• Savings Accounts: Comparing different savings accounts based on their compounding frequency and interest rates.
• Loan Repayment: Understanding how compound interest affects the total cost of loans and mortgages.
• Investment Planning: Making informed decisions about investment strategies and time horizons.