Compound Interest Calculator
***This compound interest formula calculator shows how much money you will have after a period of time, based on initial amount invested, interest rate, and the number of times compounded.
* When entering the percentage value, input the percentage without a decimal -- i.e. 5% is 5; the calculator considers the decimal.
Principal: The money you invest with a bank or investment company.
Interest rate: The amount of money you get paid for every dollar you invest
Time: Length of time money will be in the bank or with the investment company.
Compound Frequency: How often interest is calculated.
Compounded annually = 1
Compounded semiannually (6 month basis) = 2
Compounded quarterly (3 month basis) = 4
Compounded monthly = 12
Compounded daily = 365
Compound Interest Formula
The formula to calculate compound interest (when finding A) is:
A = P(1 + r/n)ntWhere,
- A = Amount of investment after interest has been compounded
- P = Principal amount (initial investment)
- r = Annual interest rate
- n = Number of times the interest is compounded per year
- t = Number of years (time)
It is important to note that compounding interest means the interest is calculated on the initial investment (principal) and on all interest earned previously. It also makes the assumption that all interest that is earned over the period will continue to be applied to the principal and remain in the investment. This principal and interest will continue to earn interest at the stated rate.
Difference Between Simple and Compound Interest
While working for ShoeBurger Corp. you received a performance-based bonus of $20,000; the company did great and your boss recognized your solid performance and contribution. You want to invest this money so you go to the bank and ask what your options are. The bank offers you 7% simple interest (which is a completely made up number for illustrative purposes!). Next you go to an investment firm and they offer you 7% compounded annually. Note the difference in the offers; simple interest vs. compounded annualy. You want to see what the actual difference will be over a 4 year period. The following illustrates the difference:
| Year | Simple Interest Calculation | Simple Interest | Compound Interest Calculation | Compound Interest |
| 1 | $20,000 × 7% | $1,400 | $20,000 × 7% | $1,400 |
| 2 | $20,000 × 7% | $1,400 | ($20,000 + $1,400) × 7% | $1,498 |
| 3 | $20,000 × 7% | $1,400 | ($20,000 + $1,400 + $1,498) × 7% | $1,602.86 |
| 4 | $20,000 × 7% | $1,400 | ($20,000 + $1,200 + $1,498 + $1,602.86) × 7% | $1,715.06 |
| Total Interest | $5,600 | Total Interest | $6,215.92 |
As you can see, there is a fairly significant difference in how much money you will have after just 4 years, just by accepting the investment option that compounds annually. Often investments will compound quarterly; ie. a stock with quarterly dividends... but the caveat to this is the price of stocks varies, so while a company may have a consistent dividend percentage, the price of the stock will impact the return, or what you would expect to have after a period of time.
Additional References:
Compound Interest Financial Planning Tool
