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The Compound Interest Calculator
Watch for the apparition of a professional, fully featured downloadable
desktop compound interest calculator on this page by early 2014. Our
calculator is currently still under development.
In the interim, I have added a few articles of interest on the topic of
compound interest below. "The Magic of Compound Interest" which details
the formula to use to calculate compound interest, and the second article
"Understanding Compound Interest". Please bookmark
this page, and come back in a few months for the
Articles On Compound Interest
The Magic Of Compound Interest: The
Formula for Calculating Compound Interest
By Bill G. Page
Christians are called to be good stewards of God’s resources. A steward
can be described as someone who manages the resources of another. “The
earth is the Lord’s and all that is in it, the world and those who dwell
therein”—Psalms 24:1 (The New English Bible).
To effectively manage God’s
financial resources, it helps to have some understanding of modern day
financial concepts, strategies, and mathematical formulas. Compound
interest is a great ally in catapulting you toward achieving your
financial goals. Through an understanding of compound interest, God can
pour out a blessing upon you, which you will not be able to measure!
Albert Einstein once called compound interest “the world’s most impressive
invention” and dubbed it the “eighth wonder of the world.”
interest means all the money you’ve invested earns interest and then the
combined amount of the original investments plus your interest earns more
Compounding means interest added to interest. Compound interest
does not produce linear growth like the pattern 1, 2, 3, 4, 5, 6, and so
on; it produces geometric growth through compounding like the pattern 1,
2, 4, 8, 16, 32, and so on.
Usually, the more frequently your money
compounds when earning interest, the better. For example, daily
compounding is normally better than monthly compounding, which is better
than quarterly compounding, which is better than yearly compounding.
A basic formula for compound interest is as follows:
FV = ID (1 + R)T, then FV – ID
FV = Future Value
ID = Initial Deposit
R = Rate (interest rate earned)
T = Time (number of years invested)
Assuming the following investment--$10,000 Initial Deposit, 6% interest
Rate, 5-year Time period, the math would work as follows:
FV = $10,000.00 x (1 + 0.06)5
Formula results by year are as follows:
Year 1 $10,000. 00 x (1 + 0.06)1 = $10,600.00
Year 2 $10,600. 00 x (1 + 0.06)2 = $11,236.00
Year 3 $11,236. 00 x (1 + 0.06)3 = $11,910.16
Year 4 $11,910. 16 x (1 + 0.06)4 = $12,624.77
Year 5 $12,624. 77 x (1 + 0.06)5 = $13,382.26.
Then FV – ID = $13,382.26 - $10,000.00 = $3,382.26 (Total Interest
The effect of the individual parts of the formula in combination with each
other produces synergistic results in the outcome that are greater than
the sum of its parts individually. In other words, small increases in any
of the components can have a dramatic incremental effect on the total
compound interest earned.
Another useful tool in approximating the magic of compounding is the “Rule
of 72.” Albert Einstein is credited with discovering the compound interest
Rule of 72 and said, “It is the greatest mathematical discovery of all
The Rule of 72 is a mathematical way of approximating the number of
years it takes an investment to double in value. You estimate the number
of years for an investment to double by dividing 72 by the annual rate of
return. For example, if you expect to earn a 10% return on your $10,000
investment, then 72 divided by 10 = 7.2 years for your investment to
double in value to $20,000.
Conversely, if you expect your $10,000
investment to double in 7.2 years and you want to know the interest rate
needed, you simply take 72 divided by 7.2 = 10% interest. You can even use
it to compare stock market interest rate returns to other investments. For
example, assume you are looking at lots with a real estate agent.
agent tells you the properties have doubled in value during the last 14
years. You could get a quick estimate of the increase per year in value by
doing the following math: 72 divided by 14 = 5.14% per year.
There is one formula that is infinitely more important than even the “Rule
“1” cross + “3” nails = “4” given.
Bill G. Page is the author of Making Money Work: A Christian Guide For
Personal Finance. This book explains the “Rule of 72” and many other
financial concepts. It includes a CD ROM so you can easily calculate
compound interest and lots of other complicated financial formulas. The
book can be ordered from www.MakingMoneyWork.us or you may request the
book from your local Christian bookstore—available to retail stores
through Spring Arbor and Appalachian Christian book distributors beginning
in September 2005.
This article is adapted from Making Money Work: A Christian Guide For
Personal Finance with permission of Willie Glenn Page, Inc. Copyright
Bill G. Page
Making Money Work: A Christian Guide For Personal Finance (book and CD
Understanding Compound Interest
By John Mussi
With all of the financial terms in the world, it seems that few are more confusing than compound interest. Perhaps it is the name that leads people to misunderstand exactly how it is that compound interest works, or maybe it's the formula that is used to compute it.
Compound interest doesn't have to be confusing, however; the information below should answer most if not all of your questions concerning compound interest and how it can affect you.
What Compound Interest Is
Compound interest is simply interest that is collected both on the principal (the original amount) and the interest that has already been applied to the principal. This means that each time interest is applied to the amount (also known as being compounded), the amount of interest compounded will be added to the principal for the next time that the interest is compounded.
To put it more simply… compound interest means that every time interest is applied, it is applied based upon the entire amount instead of just the principal.
What Compound Interest Does
Since compound interest is applied to all of the money held within the account being compounded, this means that as time goes by more money will accumulate within the account because each increase will subsequently increase the amount being paid. This is most often the case in savings accounts and interest-bearing chequeing accounts, as well as with the interest due on many loans.
How Compound Interest is Calculated
The formula for calculating compound interest is written as A = P(1 + r) n, with A being the amount of money accumulated after the interest is compounded, P being the principal amount of deposit, r being the annual rate of interest, and n being the number of years over which interest is collected. If the interest is being compounded more regularly than once per year, the r is divided by the number of times that the interest is being compounded (for monthly interest, this would be 12 times, and for daily interest it would be 365 times.) As an example, imagine P being 100, on 5 percent interest (compounded monthly), over a period of 5 years. This would look like A = 100(1 + 5/12) 5 , or 100 x (1 + 5/12), with the portion in brackets multiplied by itself 5 times.
How Compound Interest Works for You
Since compound interest pays additional interest money based upon the interest that has already been paid, this means that as time goes by you will be making a significant amount of money simply from having your principal deposit in your savings or other bank account. You should be sure to keep in mind that many banks and other lenders use compound interest on their loans as well, so that the longer that you take to repay the loan then the more you will have to repay. This can be an incentive to repay debts during a grace period, or at least to do your best to pay off the debt as early as possible so that you can save as much money as you can.
Finding the Best Compound Interest Rates
In order to find the best compound interest loan rates, it's important to take the time to shop around and explore your various options concerning the type of account or loan you're looking for. Request rate quotes and compare them to each other to ensure that you get not only a rate that you're satisfied with but also the best rate that you can get.
John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the