Compound Interest Calculator: Intuitive and visual!

What is compound interest?

Compound interest is a situation of capital gain (an interest) in which the profits obtained in each period are reinvested. In this way, an economic return is created both on the initial investment and on the profit we have made in each previous period.

The profits obtained in the first period are accumulated to the initial investment, thus generating more profits in each consecutive period. In this way, thanks to compound interest, a multiplying and exponential effect is achieved on the initial investment.

For practical purposes, it is simply a matter of not withdrawing the profits that we can obtain with an investment and allowing these profits to generate more economic returns in the years to come.

This strategy, which may seem trivial, can produce profound changes in the portfolio of any investor, being with great certainty responsible for the fortunes held by the majority of millionaires and billionaires on the planet.

In fact, among investors a story is told, the veracity of which is not entirely clear: It is said that when Albert Einstein was still alive, a reporter asked him what, in his opinion, was the greatest invention of mankind.

Einstein responded by saying that mankind’s greatest invention was compound interest, adding that it was “the most powerful force in the universe. Compound interest is the eighth wonder of the world.”

Indeed, when one glimpses the effects of compound interest its results seem like magic.

A practical example of compound interest

Let’s see the real effect of compound interest with a practical example. Imagine that you invest $10,000 in the stock market. Each year you get, on average, a 6% profit due to the appreciation of your shares plus an additional 2% in dividends: In total you get an 8% return on your investment each year.

That 8% represents that every year you earn $800, profits with which you can do 2 things:

• Take them out and keep them under your mattress
• Reinvest them in the stock market with the rest of the capital.

With the first scenario, after 30 years you will keep your invested capital ($10,000) and in addition, you will have earned $800 each year for 30 years ($800 x 30 = $24,000), which you will have stored under the mattress. In total you will have $34,000.

In the second scenario, after 30 years, you will have a total of $100,626.57. You will have multiplied your money by more than 10.

How is it possible for the difference to be so noticeable?

Due to compound interest. If you reinvest each year’s return, your profits will not increase linearly, but exponentially.

In the case of compound interest, during the second year you would no longer be investing $10,000, but $10,800. Thus, your second year’s profit would no longer be $800, but would have increased to $864 as the principal invested increased. The third year, once again, you would not be investing $10,000 either, you would be investing $11,664. And so on and so forth, getting an ever-increasing increase in your invested money.

So, what is the moral of compound interest applied to stock market investing?

Very simple: Do not withdraw profits from the initial investment when your assets appreciate and always reinvest the dividends you earn.

It may seem that the difference is not much from one year to the next, but thanks to the “magic” of compound interest the cumulative difference over the years is abysmal.

What is the formula for compound interest?

Calculating compound interest using its formula is not at all complicated and it may be interesting to know at a mathematical level how it is done. The formula for calculating compound interest is as follows:

An example of calculating compound interest using its formula

Let’s see how to apply the above formula by means of a simple compound interest calculation. Suppose we want to invest a total of $20,000 (“P – Principal” in the formula above) for 20 years (“t – Time” in the formula) in an S&P 500 index fund with an average annualized return of 8% (“r -Interest Rate”).

To calculate the total that we will obtain after those 20 years (i.e., the “A – Total Amount”) we only have to solve the equation.

As we can see, the final capital after 20 years and having invested $20,000 with an average annualized interest of 8% would be $93,219.14.

How to calculate the compound interest for quarterly, quarterly, monthly, weekly or daily periods?

As you will be able to deduce from the formula above, the variable n contemplates the periods of savings, regardless of whether these are days, months, quarters, years or decades.

More specifically, the variable n contemplates all the periods in which interest is “compounded”; that is, when interest is charged.

If you charge interest every day on your investments and you want to calculate the daily compound interest after one year you will only have to substitute the variable n for 365 (days) and adjust the interest rate (r) to what you receive from your investments as daily interest.

If, for example, you receive interest on your investments quarterly and you want to calculate the quarterly compound interest after one year you would substitute the variable t for 4 (a year has 4 quarters) and adjust the interest rate to the average returns you receive each quarter.

As we can see, the important thing is that both variables (interest rate and time) are referenced to the same period of time, regardless of whether they are days, hours or decades.

Add the compound interest calculator to your own web site or blog!

Want to add the compound interest calculator from this page to your own website or blog? It’s very simple, just copy and paste the code below where you want it to appear:

<script src="https://cdn.jsdelivr.net/npm/iframe-resizer@4.3.2/js/iframeResizer.min.js"></script><iframe id="calIC" style="overflow: hidden; width: 100%;" src="https://investortimes.com/cal-ci/1.2/" height="1" frameborder="0" scrolling="no"></iframe><script>iFrameResize({ log: true, checkOrigin: false }, '#calCI')</script>