Compounding Interest Calculator

It's important to start allowing about your fiscal future now, so that you can make smart choices that will pay off in the long run. One of the most important things you need to understand is compounding interest. This is when the interest you earn on an investment is reinvested, so that it generates more interest over time.  To help you get a better understanding of how compounding interest works, we are going to introduce you to a helpful tool, the compounding interest calculator. This calculator can help you see how your investments will grow over time, and give you a better idea of what you need to do to reach your financial goals.  So, what is compound interest exactly? To put it simply, compounding interest is the process of earning interest on your interest. For illustration, if you invest $1,000 at a 5% interest rate, you will earn $50 in interest the first year.  If you reinvest that interest back into your investment, the next year you will earn interest not only on your original $1,000, but also on the $50 in interest you earned the previous year. This means that your investment will grow at an exponential rate, rather than just a direct interest rate.

Compound Interest is a Two Edged Sword

Compounding interest can be an important tool for creating wealth, but it can also work against you if you are not careful. For example, if you have a credit card with a high interest rate, compounding interest can cause your debt to grow at an intimidating rate. That is why it's so important to understand how compounding interest works, and to use a compounding interest calculator to see how it'll affect your investments or debt balances over time.  To use a compounding interest calculator, you simply need to enter some introductory information about your investment. For illustration, you will need to know the starting amount of your investment, the interest rate, and how many months you want to invest it for. The calculator will also show you how much your investment will grow over time, with the assumptions you've made.  One of the great effects about using a compounding interest calculator is that it allows you to see the impact of different investment opinions. For illustration, you can see how much more you will earn if you increase your investment amount, or if you choose an investment with a higher interest rate. This can help you make informed decisions about your investments. This will give you a better chance of reaching your goals. 

Another crucial benefit of using a compounding interest calculator is that it can help you plan for the future.  However, like buying an auto or paying for college, you can use the calculator to see how much you need to save each month in order to reach that goal. If you are saving for a specific thing. This can be a great motivator, and help you stay on track with your savings plan.  It’s important to start allowing about your fiscal future now. By understanding the power of compounding interest, and using a compounding interest calculator, you can make smart investment decisions that will help you reach your desired outcome. Whether you are saving for a specific thing, or just looking to creating wealth over time, a compounding interest calculator is an essential tool for anyone who's serious about their finances.

How to Use The Compounding Interest Calculator

This compounding interest calculator will tell you how much your money will be worth if you leave it in an interest bearing investment for a period of time. Compounding means that you not only earn interest on the principal(your original money invested) but also on the interest that you are earning each time period(compounding period).

Using the simple example of a savings account, the inputs to the compounding interest calculator are:

The investment amount or your deposit in the savings account.

• The annual interest rate or nominal rate.
• The term or length of time the money is left in the savings account(in months).
• The compounding times per year or the number of compounding periods.

This compounding interest calculator will tell you how much your money will be worth if you leave it in an interest bearing investment for a period of time. Compounding means that you not only earn interest on the principal(your original money invested) but also on the interest that you are earning each time period(compounding period).

Using the simple example of a savings account, the inputs to the compounding interest calculator are:

The investment amount or your deposit in the savings account.

• The annual interest rate or nominal rate.
• The term or length of time the money is left in the savings account(in months).
• The compounding times per year or the number of compounding periods.

Effective Interest Rate

When you use the compounding interest calculator, you will notice that 2 different interest rates are outputted. The second one is the nominal interest rate. It is the same as the annual interest rate that you inputted into the boxes. The effective interest rate is the annual interest rate after the effects of compounding. So the more times that compounding occurs, the higher the effective interest rate will be. Let's try a test of this. Enter $1000. for an investment amount, 6% for the annual interest rate and 60 months for the term.

After 3 or 4 compoundings per year, there is not a significant effect with more compoundings.

Summary

The compound interest calculator tells you how much more your investment will grow with compounding vs not having compounding.