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All About Compound Interest Calculators Compound interest means that the interest is paid not just to the principal balance of your account but also, to other interest that it has accumulated previously. Compound interest can produce massive gains onto your investment over a long period time. This is exactly the primary reason why such concept of investing is something that a lot of investors are so eager and interested to understand. The truth is, there are 2 ways to which interests can be calculated and these are simple and compound. When it comes to simple calculation of interest, it is actually easier to be carried out as what the name suggests, simple interest means that the principle balance is what being calculated. And with that said, to be able to calculate the simple interest, you simply need to multiply your rate of interest by the number of years that you are considering as well as your principal balance. So to give you a quick example of how simple interest calculation works, assuming that you buy a bond for 1000 dollars that pays 5 percent simple interest for 30 years, you are going to receive 50 dollars annually for the next 30 years as interest payment, which is a total of 1500 dollars in interest. The interest stays the same every after year in simple interest.
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As for compound interest on the other hand, what is meant by this is that, the interest is paid on principal balance and any interest that it has accumulated previously. To give you an example, if you’ve invested 10000 dollars on sometime with a compound interest of 4 percent, you’re going to receive 400 dollars in interest after the first year which will give you a total amount of 10400 dollars. The interest is calculated as 4 percent of new balance or 416 dollars which gives you total of 10816 dollars at the end of second year. For the subsequent years, the process will be repeated.
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For the formula in computing compound interest, it will be A = P (1+r)t in which A is the ending amount of money, while P is the principal and r is the interest rate that’s expressed as decimal so 5% is equivalent to .05 and t is the number of time in years. There are compound interest calculators that are available online as well which are intended for the purpose of getting an estimate and not for financial advice or planning. Like with any other tool, it is as accurate as assumptions it’s making and the data it has and something that you must not rely on as substitute for a tax professional or a financial advisor.