compound interest calculator
Anyone who invests your money should take advantage of the effect of compound interest. The longer the investment lasts, the greater its effect. With our compound interest calculator you can calculate how high the compound interest will be during a given investment period.
The compound interest effect is one of the most important tools when it comes to increasing wealth in the long term.. Many people know this, but very few can imagine how much compounding interest will affect their investments in the long run. For this reason, we have designed this compound interest calculator for you, which shows you the effect of compound interest in a very simple way.
It takes a lotpatience and discipline to get the most out of compound interest, since it takes a certain amount of time to show its magic. You must reinvest any interest or dividends you receive each interest payment period. If you do not reinvest the interest, you will be using simple interest and your invested capital will not grow.
As we have mentioned before, our compound interest calculator assumes that the interest earned is reinvested. In order not to make it unnecessarily complicated for you, we have assumed that contributions are made at the end of each month. Although the calculator is in Euros, the calculations are the same regardless of the currency. Let's see now the boxes that you must fill in:
initial investment
If you already have money available that you have already invested or still want to invest, you can enter that amount in this box.
We've put €5,000 by default, but you can of course enter a zero in this box if you want to calculate compound interest without an initial principal.
Calculate the final capital at age 18 for a child, for whom you invested €10,000 at 5% at birth, without continuing to make contributions each month.
monthly contribution
In addition to a onetime payment (initial investment), monthly contributions are the second option for investing money. If there are no contributions, you can leave this box at €0. Of course, both forms of investment can be combined, that is, invest an initial capital and additionally make contributions each month. Our calculator works with all possible options.
As George S. Clason points out in his book "The richest man in Babylon", one of the keys to achieving wealth is to save and invest at least 10% of your takehome pay, ideally even significantly higher. For young people, the savings rate should be significantly higher, as it will never be that easy save money as long as there are no major financial obligations. Knowing what your monthly income and expenses are is essential to know your monthly savings rate and can be determined with the help of some home budgets. Here you can download our Excel home budget template for free.
Now calculate, for example, the final capital for the aforementioned child up to the age of 18 if he saves €50 each month at 5% from his birth. As you will see, the final capital is much less, although in this example you have deposited €10,800, that is, 800 more than in the first example.
The sooner we invest our money, the more we benefit from the compound interest effect.
Investment Duration
This field is possibly the most painful of all, since you will discover thatthe magic of compound interest takes time to work. Young people in particular find it difficult to have to give up consumption today, to "only" have enough money when they reach retirement in, say, 35 years.
Play a little with the investment duration variables and the monthly contributions to optimize your result. For example, if you have an amount of money in mind to achieve financial freedom, you can achieve it in fewer years if you save more.
Interest payment
The interest payment interval is possibly the factor that least influences compound interest, even so, with large sums of money, the differences are substantial. As we saw at the end of the blog article onthe magic of compound interest, the more frequently you receive interest and reinsert it, the greater the effect of compound interest.
In the calculator you can see how the monthly interest payment always provides you with higher interest than the annual interest payment.
Annual interest
The annual interest rate that you expect to earn on your investment is the most uncertain factor in your calculation.
However, in the long run, your achievable interest rate (the annual return on your investment) is much easier to plan for than you might think right now. Just because things may have gone bad in the stock market for a few years doesn't mean that yields and interest rates will stay low in the long run.
Change the interest rate by 1% and see how your final principal changes. You'll find it's the most powerful adjusting nut you can turn. Even if you save €100 more each month for more than 35 years, you will have less principal than if you earned 1% more interest per year.
Therefore, it pays to think about the interest rate you want to achieve and then consistently push yourself year after year to achieve it. The statement “I want the highest possible interest rate every year” is detrimental, as it will not allow you to develop a clear investment strategy. With the passive investing approach through ETFs, which we are big fans of, it is quite possible to generate a return of 7% per year.
We hope that the interest calculator is useful to you and that you use it for your financial planning or to calculate interest in other areas of life. We look forward to your comments. Let us know what kind of tools you might also find useful.
If you want to calculate compound interest using data you already have in a spreadsheet, Excel provides you with a formula that automatically calculates it for you calledFuture Value (FV):
The arguments to enter in this formula are the same as in our compound interest calculator with some clarification:

Interest rate

Number of periods

Contributions: To calculate compound interest, you must put the negative sign in front of it.

Initial investment (Optional): To calculate compound interest, you must put the negative sign in front of it

Type (Optional): Indicates the moment in which the contributions are made (0 if the contributions are made at the end of the period and 1 if they are made at the beginning of the period)
Always maintain uniformity in the use of the units with which you introduce the first two arguments (interest rate and number of periods). If you make monthly contributions for 10 years at 5% annual interest, then use 5%/12 for the interest rate and 10*12 for the number of periods. If you make annual payments, use 5% for the rate and 10 for the number of periods.

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