Compound interest is one of the most important concepts for investing. It's about investments that many people are unfamiliar with, but it plays an essential role in making investments profitable.
If you are curious about compound interest and want to know how it works, you are on the right track. This post has a compound interest calculator that will quickly and clearly show you how much money you can make investing in an account that provides compound interest.
Use the calculator below to get an idea of your potential earnings, then read the sections below to learn more about how you can make money from compound interest.
Compound interest calculator
First, tell us about your investment plan to Fill in the fields below.
Initial investment amount: The total amount you initially invest or currently have invested in your investment objective.
Years to accumulate:
Years to accumulate: The number of years you need to save.
Periodic contribution: The amount that you will bring in each time period and the frequency with which you will regularly contribute to that investment.
Return on investment: This is the return a person would expect from their investment. It is important to remember that these scenarios are hypothetical and that future returns cannot be predicted with certainty and the actual return over time can be very common.
Connection frequency: Interest on the interest of an investment plus previous interest. The more frequently this occurs, the more likely your accrued interest will generate additional interest. You should check with your financial institution how often the interest rate increases on your particular investment.
Years to accumulate:
Years to accumulate: This is the length of time before you withdraw or use your investments.
Compound interest earned
Earned simple interest
Investment growth over time
Compound interest earned
Earned simple interest
Use of a compound interest calculator
Using the compound interest calculator is easy. Follow these steps to see what compound interest investments can make you.
Enter your original investment. It can be any value you like, but it helps to make a realistic value out of it. For example, if you are currently saving to invest, once you have saved enough, you can wager the amount you want to invest.
Next, enter the amount you want to add to your investment portfolio each month. This can also be any value. However, it is most useful if you enter an amount that you can budget for. Even if that's only an extra $ 10 a month, it makes a difference.
Choose whether your interest should be calculated annually, monthly or daily. (If you don't know what this means, use the definitions below.)
Enter the estimated rate of return. However, this can vary considerably Index funds and similar investment vehicles Return between 2% and 10% return.
Enter your time horizon – the length of time until you withdraw or use your investments.
Once you've completed the calculator, you can should see a estimate the amount you are likely to have when the compound investment period has expired. If you are unsure how we got this number or what to do to grow your money this way, check out the definitions, guides, and frequently asked questions below.
Compounding: This occurs when the money made from an investment is reinvested, increasing the total amount of interest that will be earned on the next compound interest.
Index funds: Index funds are bundled investments that roughly replicate the growth of a market index, which is a collection of listed companies. They are often taken into account lower risk investments.
Interest: The money you make from your investments; Essentially, the money you make investing in the success of a company, government bond, or fund.
Principal: The amount of money you will start out with when you start investing.
Return: The rate at Which You get interest – for example, a 3% return means that for every $ 100 invested, you make $ 3.
Returns: The money you make from your investments.
Time horizon: The time you want to invest.
Now that you have in mind some key compound interest definitions, we can explain how this works.
How does compound interest work?
When you have more money, you can make more money – that's the principle behind compound interest. Here's how it works. Let's say you have to invest $ 1000. You put it in an account (let's say a money market account) that gives 2% interest compounded monthly. At the end of the first month, you'd have $ 1,020. So far, so good.
But this is where things get really interesting. That 2% return now applies to the total of $ 1020, not just the main $ 1000 investment. So after the end of the second month, you have $ 1,040.40 – an increase of $ 0.40 compared to the previous month.
That might not sound like a lot, but it adds up. Have you ever rolled a snowball down a hill? The same idea applies. As your money grows and increases itself, the amount it can add to itself at the next interest markup is greater. It may not be a get-rich-quick program, but it is a fairly safe way to build your wealth for the long term.
In addition, you are not limited to money market accounts with interest rates as low as 2%. If you are ready To add a little bit of risk, you can get returns of up to 10% in some cases. We'll cover this in more detail in a later section. But first, time to do some math homework (only for those who are curious!).
Compound interest formula
Compound interest is really interesting mathematically. Here is the formula: A = P (1 + r / n) (nt)
If you want to try to see what's going on behind the scenes in our calculator, you can do the math yourself using the compound interest formula.
The A in the formula is the amount that you will end up with. that comes last.
The P in the formula above represents your capital, which is the amount you start with.
Multiply P by 1 + your interest rate r (given in decimal; 4% would be 0.04) divided by nhow often your interest is compounded in a given time period.
Elevate all of that to the power of n times t, Where t is the number of elapsed time periods.
For example, if you invest for 12 months and your account interest is calculated daily, n would be about 30, and t would be 12 if you wanted to know how much you're going to have in a year.
Try the formula yourself and see what result you get compared to the result in our calculator to check your work!
Compound interest accounts
After you understand the basics of compound interest, you are probably wondering how you can use it to grow your wealth. The key is to use compound interest accounts. Here are some examples:
High Interest Savings and Money Markets. These are essentially savings accounts. They're not investment accounts (which we'll talk about in a moment), but they use a similar principle to grow your money. The prices for these options can be relatively low compared to other options, but your money remains available so you don't have to worry if you need to access your money quickly in an emergency.
Retirement accounts. If you've just opened a 401k or IRA, this is good news: you are already accessing compound interest options. Most retirement accounts use a diversified and stable portfolio to keep your money growing over time. You invest in index funds, government bonds, and dividend stocks to build your nest egg.
Investments. Of course, one of the most aggressive and effective ways to harness the power of compound interest is to start investing. There are a few different ways you can invest – be sure to read our guide Investing for Beginners for a more thorough explanation – but all of them can include compound interest. For example:
Dividend stocks sometimes allow you to reinvest the payout from your dividends and increase the amount of your dividend on the next payout.
Index funds like mutual funds and ETFs also often allow investors to reinvest their profits by using compound interest in their favor.
Investing in stocks directly means you can always use the money you make to reinvest or invest in another stock. Note, however, that this is a riskier option.
Whether you choose on Through personal mediation or a trendy new robo-advisor, you can likely use the power of compound interest to grow your capital.
Compound interest is a mathematical force that can help you build your wealth over time. You can get started today by finding the right investment or savings vehicle for your personal finances. Don't forget to download the Mint app which is convenient for you to keep track of your investments in one place.
Frequently asked questions about compound interest
How do I calculate compound interest?
You can calculate compound interest in two ways: You can Use the formula above to calculate it by hand, or you can use the compound interest calculator to get your grand total faster. Just make sure you know the variables required:
The principal amount
Your interest rate
How often is it composed
The number of interest periods that will occur
What will $ 10,000 be worth in 20 years?
That all depends on how much interest your account is generating and whether you invest more over time.
Let's take an average response rate of around 7%and assume you are not adding any more money. In that case, your $ 10,000 could turn into $ 40,547 – still an impressive amount. That is the power of compound interest.
How do you calculate compound interest monthly?
To calculate compound interest on a monthly basis, simply set the “compound interest frequency” setting in the above calculator to “monthly”. Alternatively, you can use the formula above and set it n equal to 1 and t equal to 12 to find out how much money you have if the interest is calculated monthly for a year.
Wealth simply | Investor.gov
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