Step by Step Tutorial: How to Calculate Compound Interest
Compound (compounding) interest plays a very important role in financial planning. A compound interest calculator is a very useful tool when planning your savings and investing goal over a number of years.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein
What is Compound Interest?
In this guide I will cover what compound (compounding) interest is, how it works and how to use the below compound interest calculator.
Compound interest is the financial term used to describe the process of earning interest on top of your interest. It is a powerful tool that can work in your favor help you grow your savings and investments more quickly over a period of time.
The way interest is credited to an investment has a significant impact on how your investment grows. The more often your account is credited interest the faster it will grow over time. Compound interest is often calculated on retirement savings, certificate of deposits (CD) and fixed annuities.
A compound interest calculator makes calculating compound interest an easy task; you only need to enter a few inputs specific to your investment and the calculator will do the rest.
How to Use a Compound Interest Calculator
Here are some step-by-step instructions for how to use this calculator:
There are four input boxes in the compound interest calculator. Simply enter your information and hit Tab to jump to the next field. Here’s what to enter:
1. Your initial deposit:
Enter the amount you have available to save at the beginning. Don’t bother with dollar signs or commas – the calculator will take care of those automatically.
2. Years to save
Enter the number of years you will keep that money on deposit in your account.
3. Estimated rate of return.
Enter the interest rate on your current bank account or one you are considering. Once you enter a deposit amount, the calculator will display some featured bank offers. You can click on one of these so the calculator will automatically show how their interest rate will grow your money, or you can enter a rate yourself.
4. How often is interest compounded?
Select a compounding frequency from the menu: Daily, Monthly, Semi-Annually, or Annually.
Your results:
When you click on the Calculate button, your results display immediately below. The amount is how much money you will have at the end of the period you selected. However, this does not take into account the effect of any fees in the account. Be sure to check the fee schedule carefully before signing on for any account.
Today's Top Guaranteed Annuity Rates by Investment Term
If you are considering investing in a new savings account you can find the best current fixed annuity rates for 2 year annuities through 10 year fixed annuities in the annuity tables below..
