Compound Interest Calculator
Uncover the power of compounding with our Compound Interest Calculator. Just provide your investment details and let the calculator do the rest. It illustrates your potential earnings over time, providing a year-by-year breakdown of your returns. It's an essential instrument for anyone looking to make the most of their investments.
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Frequently Asked Questions:
What is compound interest?
Compound interest is the interest you earn on both your original money and on the interest you continually accumulate. It can significantly increase your wealth over time because it causes your total amount to grow at a faster rate compared to simple interest.
Example 1:Savings Account
Savings Account Imagine you put $100 in a savings account that offers a 5% annual interest rate. At the end of the first year, you'll earn $5 in interest (5% of $100). So, your total balance becomes $105. In the second year, the 5% interest will be calculated on the new total, which is $105.
This time, you'll earn $5.25 in interest (5% of $105). Your new balance is $110.25.The process continues each year, and your savings grow faster because you're earning interest on the interest you've already earned.
Example 2:Investment
Suppose you invest $50 in a magic money jar that historically grows by 10% per year. After the first year, your investment will increase by $5 (10% of $50). So, your investment will be worth $55. In the second year, the 10% interest will be calculated on the new total, which is $55. This leads to an increase of $5.50 (10% of $55). Now, your investment is worth $60.50. Over time, the magic money jar helps your investment grow, and you'll notice the amount it grows each year gets bigger and bigger.
Example 3:Loan
Consider you borrow $200 from a friend with a 2% monthly interest rate. After the first month, the interest on the $200 will be $4 (2% of $200). So, your new debt is $204. In the second month, the 2% interest will be calculated on the new total, which is $204. This results in an interest of $4.08. Your new debt is $208.08. This process continues each month for the loan term. Your debt increases each month because you're paying interest on the outstanding amount.
Example 4:Retirement Savings
Suppose you start saving for retirement by putting $50 each month into a special retirement fund with a 6% annual return. You plan to retire in 20 years. After the first year, you'll have contributed $600 ($50 per month), and with the 6% interest, your retirement fund will be worth approximately $636. Over the years, the power of compound interest kicks in. By the time you retire, your retirement fund will have grown significantly, thanks to the compounding effect.
How does compound interest work?
With compound interest, the interest you earn each period is added to your principal, forming a new principal. The next period, you earn interest on that new, larger principal, and this process keeps repeating.
Why is compound interest important?
Compound interest is a powerful concept because it allows your money to grow faster due to the accumulation of interest on the initial principal and the interest already earned. This means the longer your money is invested, the more opportunity it has to earn interest on the interest, essentially creating a snowball effect.
What's the difference between compound interest and simple interest?
Simple interest only applies to the principal amount, while compound interest applies to the principal amount and the accumulated interest. In other words, with simple interest, you're only earning interest on the original amount of money, but with compound interest, you're earning interest on the original amount of money and the interest it has already earned.
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