The compound interest calculator is used to check how much money can grow over time using the power of compounding.
A compound interest calculator is a free tool designed to compute the future value of investments or savings when compound interest is applied. It's beneficial for individuals and businesses to understand the potential growth of investments over time. Also, it helps in financial planning and decisionmaking by providing insights into different factors.
Money makes money, and the money that money makes, makes more money. Compound interest is the interest calculated on the initial principal of an investment that also includes all the accumulated interest from previous periods. In short, it's interest on interest and speeds up the growth of your investments.
Let's understand this term with an example.
A = P( 1 + 

)^{nt} 
Where,
A = Final amount (principal + interest earned)
P = Principal amount (present value)
r = Annual interest rate (in decimal)
n = Number of compounding periods per year
t = Total time (in years)
Let's understand how the compound interest is calculated with an example.
Suppose you make an investment of $5000 at the rate of 5% annual interest compounded monthly. Find out the future value after 10 years.
Here,
P = $5000
r = 5/100 = 0.05 (in decimal)
n = 12 (compounded monthly)
t = 10
Now put all the values in the compound interest formula.
A = P( 1 + 

)^{nt} 
= 5000( 1 + 

)^{(12 × 10)} 
= 5000 × (1.0041667)^{120}
= 5000 × 1.647016
Future value (A) = $8235
So, you will earn a total interest of $3,235 and final value will be $8,235 in 10 years.
Simple interest is calculated on the principal amount only. While compound interest is calculated on the previous interest plus the principal amount. Also, in simple interest, the interest for each year is the same, unlike compound interest.
It's useful in various ways:
It means at what interval of time the interest will be accrued. For example, every month, every quarter, or annually.