How to calculate compound interest with example in excel

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How to calculate compound interest with example in excel

On this page is a detailed compound interest calculator, along with the compound interest formula and examples.The calculator allows you to calculate compound interest from a starting lump sum, periodic additions, and for annual, monthly, and daily compounding periods. The calculator also graphs the

growth of the investment over time and report a final amount.Using the Compound Interest CalculatorInvestment Starting Amount - The lump sum at the beginning of the compounding period. If you are modeling your portfolio, use "today's value".Periodic Investment Amount - The amount, in dollars, you

add on a periodic basis.Periodic Addition Frequency - How often you add that amount to your portfolio.Interest Rate - The annual percentage rate the investment pays every year (quoted as APR if it is a bank account or similar)Periods to Compound - The number of periods of the below type that the

deposit and additions will compound.Type of Periods - How often interest is applied. This field also affects the number of periods field set above (e.g. if you select 'Daily', make sure you enter the number of days to compound).Compound Interest and Your PortfolioCompound interest is the eighth wonder

of the world. He who understands it, earns it ... he who doesn't ... pays it.Albert EinsteinCompound interest is a powerful concept fully worth grasping while learning more about your investment portfolio. At its heart: the money in your account earns interest, but the interest itself also earns interest.In a

sense: the money your money earned eventually snowballs into a larger and larger base on which you earn further interest.The exact same concept applies when discussing dividends. Over a 40 year career, dividends and interest paid on previous dividend-reinvested shares can make up the majority of

your portfolio.The Compound Interest FormulaThe compound interest formula is:Where:P is the principal, or starting amounti is the interest rate, APRn is how many times per year the sum is compoundedt is the number of years to run the calculationLet's work through a scenario now using the compound

interest calculator and the compound interest formula:Starting with $1,000, how much money would you have if you put your money into a savings account with: a 5.5% APR, compounded daily, for 5 years?A naive calculation would say: $1,000 * 5.5% = $55 a year, multiply that by 5 and you get $275 for

a total of $1,275 after 5 years.That's incorrect, however. Plugging the numbers into the calculator, you get $1,316.50.Plugging the numbers in the compound interest formula, we get:1000 * (1 + (.055 / 365) ) ^ (365 * 5) =1000 * (1 + (.0015068...) ) ^ (1,825) = 1000 * 1.3165034... =$1,316.50And there you

go: without a feel for compound interest, somebody could spirit away $41.50 with you none the wiser!The Effect of Compounding Frequency on InterestOne of the variables we noted in the compound interest calculation was the idea of compounding frequency. Think of compounding frequency as how

often the compounding works on itself (compounding on compounding - it's all compounding all the way down!). Daily compounding means the rate is applied to the balance at the end of every day. Likewise for other forms of compounding: weekly, monthly or annual. There is also the idea of continuous

compounding, where the compounding is always happening on an instantaneous sum of money.The best way to get a sense of how the different compounding period affect the balance in an account is on a graph:(Wikipedia user Jelson25(As you can see, compound interest is a simple topic with some

complicated details. In the end it boils down to one simple fact: interest works upon previous interest. Whether this helps you or hurt you depends on what side of the transaction you are.Heed Albert Einsteins advice, understand compound interest, and profit from it as much as you can.For some other

calculators and articles in our investment basics series, please try: Compound Interest Calculator (Click Here or Scroll Down) The compound interest formula calculates the amount of interest earned on an account or investment where the amount earned is reinvested. By reinvesting the amount earned,

an investment will earn money based on the effect of compounding. Compounding is the concept that any amount earned on an investment can be reinvested to create additional earnings that would not be realized based on the original principal, or original balance, alone. The interest on the original

balance alone would be called simple interest. The additional earnings plus simple interest would equal the total amount earned from compound interest. Rate and Period in Compound Interest Formula The rate per period (r) and number of periods (n) in the compound interest formula must match how

often the account is compounded. For example, if an account is compounded monthly, then one month would be one period. Likewise, if the account is compounded daily, then one day would be one period and the rate and number of periods would accommodate this. Suppose an account with an original

balance of $1000 is earning 12% per year and is compounded monthly. Due to being compounded monthly, the number of periods for one year would be 12 and the rate would be 1% (per month). Putting these variables into the compound interest formula would show The second portion of the formula

would be 1.12683 minus 1. By multiplying the original principal by the second portion of the formula, the interest earned is $126.83. Simple Interest vs. Compound Interest Using the prior example, the simple interest would be calculated as principal times rate times time. Given this, the interest earned

would be $1000 times 1 year times 12%. After using this formula, the simple interest earned would be $120. Using compound interest, the amount earned would be $126.83. The additional $6.83 earned would be due to the effect of compounding. If the account was compounded daily, the amount earned

would be higher. Compound Interest Formula in Relation to APY The compound interest formula contains the annual percentage yield formula of This is due to the annual percentage yield calculating the effective rate on an account, based on the effect of compounding. Using the prior example, the

effective rate would be 12.683%. The compound interest earned could be determined by multiplying the principal balance by the effective rate. Alternative Compound Interest Formula The ending balance of an account with compound interest can be calculated based on the following formula: As with the

other formula, the rate per period and number of periods must match how often the account is compounded. Using the prior example, this formula would return an ending balance of $1126.83. Return to Top For comparison, simple interest is Principal x Rate x Time how to calculate compound interest

excel. how to use excel to calculate compound interest. how to calculate compound interest rate using excel

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