## Compounding Interest Calculator

"The most powerful force in the universe is compound interest."
Albert Einstein

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.

## The Compounding Interest Calculator

Simply highlight the numbers in the boxes, change the numbers and click outside the boxes to get your answer.

## Effective Interest Rate

When you use the compounding interest calculator, you will notice that 2 different interest rates are outputted. The first 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.

Compounding Times/YearInvestment ResultEffective Interest Rate
1\$1338.236.00%
4\$1348.856.17%
365\$1349.836.18%

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

## An Example

Here is an example of the power of compound interest. Using the compound interest calculator let's assume that we have \$10,000. to invest. Historically the stock market has returned an average of 10% per year. We also make the assumption that we have 40 years before retirement. Plugging those numbers into the calculator, we get \$452,592.56. That's a pretty good retirement fund!

## Summary

The compound interest calculator tells you what your investment or savings will be worth over a fixed time and interest rate.

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