Here are the essentials of calculating net present value.
What can you do with a compounded interest calculator? The most important thing is that you can see what the power of compound interest is in making your money grow over time.
If you put $1,000 in a bank that pays 5% interest compounded 4 times a year, how much money would you have at the end of 5 years? Using the compounded interest calculator below, put in the following inputs: 1000, 5, 5, 1. After pressing the calculate button, you would see a result of $1282 for the future value(FV). If the bank only compounded once per year, the result would be $1276.
In the above example, compounding 4 times in a year versus 1 time results in $6 more income. Compounding 4 times means that every 4th of the year or every 3 months, the bank would deposit one fourth of the annual interest or 1.25% to your account. Having the interest paid early means that you would earn interest on the interest paid before the end of the year. This would in effect raise you effective annual interest rate from 5.0% to 5.095%.
Assume that you are investigating a stock etf that has had an average annual compounded return of 15% over the last 10 years. You think that it will continue to appreciate at the same rate for the next 10 years. You want to know how much your nest egg of $50,000 would grow in the next 10 years. So your calculator inputs would be 50000, 10, 15, 1. The result for the future value would be $202,278.
With this calculator as a tool, you can imagine and even plan how your money can or will grow. You know what money you have now. You can project what your likely return will be. From that knowledge you can estimate where your fortune will be in the future. This may be the closest thing to a crystal ball you will ever find!
A saying attributed to Albert Einstein is "The most powerful force in the universe is compound interest." Whether he really said that or not is debatable. What is true, however, is that the most reliable way to accumulate money is to let time and compound interest work in your favor.