# Compound Interest Calculator

Calculating future value with compound interest.

Compound interest is a financial concept that refers to the process of earning interest not only on the initial sum of money you invest or deposit but also on any interest that has been previously earned. In other words, it’s interest on interest.

Compound interest is powerful because the interest earned each period is added to the principal, forming a new base from which to earn future interest (this is known as “interest on interest”). Over time, this effect can lead to exponential growth of your investment.

Here’s how this calculator works:

Amount (Principal): This is the initial sum of money placed in an investment or the original amount of a loan.

Rate (%): This is the annual interest rate. It is the percentage at which the invested money will grow each year or the rate charged on a loan per year.

No. of Years: This is the number of years the money is invested or borrowed for.

Compounding Times Per Year: This determines how often the interest is calculated and added to the account balance. Common compounding frequencies include yearly (1), quarterly (4), monthly (12), or daily (365).

Calculate Button: After entering all the details, clicking this button will compute the future value of the investment or loan including interest.

The output shows you two things:

The total amount: This is the amount of money that will be in the account after the specified number of years, including interest.

The interest: This is the amount of money that was earned or paid in interest during the time period.

Here’s how compound interest works:

Principal: This is the initial amount of money you invest or deposit into an account or investment. For example, if you deposit $1,000 in a savings account, $1,000 is the principal.

Interest Rate: This is the annual percentage rate (APR) or the rate at which your money grows or earns interest. It is usually expressed as a percentage. For example, if the interest rate is 5%, your money will grow by 5% each year.

Compounding Period: This refers to how often the interest is calculated and added to the principal. It can be daily, monthly, quarterly, semi-annually, or annually, depending on the terms of your investment or financial account.

The formula for calculating compound interest is:

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

Where:

A is the future value of the investment/loan, including interest.

P is the principal amount.

r is the annual interest rate (in decimal form, so if the interest rate is 5%, it’s 0.05).

n is the number of times that interest is compounded per year.

t is the number of years the money is invested or borrowed for.

Compound interest results in your money growing at an accelerating rate because the interest is calculated on an increasing principal amount. Over time, this can significantly boost your returns compared to simple interest, which is calculated only on the original principal.

Compound interest is commonly found in various financial products such as savings accounts, certificates of deposit (CDs), bonds, and investments like stocks and mutual funds. It plays a crucial role in helping individuals accumulate wealth and achieve their financial goals, as it allows their money to grow exponentially over time. However, it can also work against you if you’re dealing with loans or credit card debt, as you’ll end up paying more in interest over time due to the compounding effect.

You would need to make this calculation in several instances:

Saving: When you’re saving money in an interest-bearing account like a savings account or a certificate of deposit (CD), you would use this to predict how much your savings will grow over time.

Investing: To estimate the growth of investments in stocks, bonds, or mutual funds that compound interest over time.

Loans: To understand the total cost of a loan, including interest, especially for mortgages or car loans where you’re paying back over several years.

Retirement Planning: To project the future value of retirement accounts, such as a 401(k) or an IRA, which benefit from compound interest over many years.