How this Interest Calculator Works
Albert Einstein reportedly called compound interest the "eighth wonder of the world." Unlike simple interest, which is calculated only on the principal amount, [Image of compound interest formula] **compound interest** is calculated on the principal amount plus the accumulated interest from previous periods. This causes your money to grow exponentially rather than linearly.
The Compound Interest Formula
A = P (1 + r/n) ^ (nt)
Where:
- A: The future value of the investment/loan, including interest.
- P: The principal investment amount (the initial deposit).
- r: The annual interest rate (decimal).
- n: The number of times that interest is compounded per unit t.
- t: The time the money is invested or borrowed for, in years.
The Power of Frequency
The "Compounding Frequency" is a critical factor. The more frequently interest is compounded (calculated and added back to the balance), the more interest you earn.
- Annually: Interest is added once a year.
- Monthly: Interest is added 12 times a year. This is standard for most savings accounts and mortgages.
- Daily: Interest is added 365 times a year. This yields the highest return.
Step-by-Step Instructions
- Enter Principal: Input the starting amount of money you are investing.
- Enter Interest Rate: Input the annual percentage rate (APR) you expect to earn.
- Select Frequency: Choose how often the interest is compounded (e.g., Monthly).
- Enter Time: Input the number of years you plan to let the money grow.
- Analyze: The graph will show the curve of your growth, highlighting how the interest component accelerates over time.