If you have reached this page you probably already know the magic of compounding, and what compound interest is. In case you don't, or just want to refresh the theory, just take a look at my other post.
This is probably the simplest compound interest calculator you can build, but it does the trick and it does show you the magic of compounding.
Fill the fields in the compound calculator as follows:
- Principal amount: Insert the starting money (often referred to principal or capital) you plan to invest. I put Dollars ($) as default but the calculation works for any currency.
- Annual interest rate (%): this is the expected interest rate (or return) per year. If you're investing into a fixed-term product like a bond or a deposit account, use that interest rate. If you want to simulate a stock portfolio you can use the average historical return (not a guarantee for the future!). For example for the S&P 500 index it's around 7%.
- Compounding frequency: this is how often are the interest paid to you. The often the better (cause you will reinvest more often those interests).
- Years: how long you expect to keep the money invested.
- Incremental deposit ($/month): if you plan to deposit extra money every month, write here the amount.
Then hit calculate and see the magic happen! In the chart you will see the comparison between how much money you would have without compounding and with compounding.
Compound Interest Calculator
Please keep in mind that in real life, if you wanted to be REALLY precise, you would adjust slightly the formulas underneath depending on factors such as:
- When you do the additional payments e.g. at the beginning of the month or at the end or at different days each month.
- Different financial institutions might do the compounding (read pay you interests and/or reinvest) at different timing. This also will impact the calculations.