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What Is A Compound Interest Calculator? Compound interest means that the interest is paid not just to principal balance of account but to other interest that it accumulated previously as well. Compound interest has the capability of producing massive gains on your investment over a set period of time. This is exactly the primary reason why such concept of investing is something that a lot of investors are so eager and interested to understand. The truth is, there are 2 ways to which interests can be calculated and these are simple and compound. In simple calculation of the interest, it’s actually the easier to be done because as what the name suggests, simple interest indicates that the principle balance is what being calculated. Having said that, in order to calculate the simple interest, you only need to multiply your rate of interest by the number of years that you consider and the principal balance too. As a quick example to how simple interest calculation works, say that you have bought a bond for 1000 dollars that pays 5 percent simple interest for 30 years, you are going to receive 50 dollars annually for the next 30 years as interest payment, which is a total of 1500 dollars in interest. In simple interest, the interest stays the same every after year.
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In compound interest on the other hand, this means that the interest is paid on principal balance and any interest that it has accumulated previously. For instance, if you have invested 10000 dollars on sometime with a compound interest of 4 percent, then you are going to receive 400 dollars in interest after the first year which gives you a total amount of 10,400 dollars. But as the second year of your account ends, the interest is then calculated as 4 percent of new balance or 416 dollars which gives you a total of 10816 dollars. This process will be repeated for the following years.
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With regards to the formula in computing compounding interest, it is going to be A = P (1+r)t in which A is the ending amount of money, while P is the principal and r is the interest rate that’s expressed as decimal so 5% is equivalent to .05 and t is the number of time in years. You are going to find compound interest calculators in the internet that are intended for the purpose of getting an estimate and not for financial advice or planning. Like with any other tool, it is as accurate as assumptions it’s making and the data it has and something that you must not rely on as substitute for a tax professional or a financial advisor.