This calculation method is simple, but it can still be a lot of work if you want many years of results. It can go much more quickly if you set up and Excel spreadsheet to do the number-crunching for you. Here's what all the letters refer to: "A" represents the final amount in the account after "t" years, compounded "n" times at interest rate "r" with starting principal "P.
Let's run through an example. It's simply "A" in the formula as we begin. Our "r" and "n" that represent our interest rate and number of compoundings, are, respectively 0. The 0. The "nt" exponent is the number of compoundings times the number of years, or 40 times 10, which is It's good that you now know how to calculate compound interest, but the good news is that you will rarely have to do so.
There are, fortunately, online calculators that can do the work for you. There's an interest calculator at Fool. Here's another nifty tool for when you want to make sense of compounding: a compounding table! Check out the example below, which shows you what you'd multiply your starting balance by if it were going to grow at a certain rate for a certain number of years:. In other words, the 9. We're compounding annually in this example.
The table can also offer some deeper insights. For example, if you know that you want to triple your money, you can look for the multipliers closest to 3. There are several.
If your head has been spinning for a while now, know that there's an easy way to figure out how long it will take to double your money through the process of compounding: the rule of The rule of 72 tells us that if you divide 72 by an annual growth or interest rate, the result will be the number of years it will take to double your money.
Note that this shortcut is fairly accurate much of the time, but not so accurate with high expected growth rates. The rule starts getting rather imprecise at rates higher than the ones above. Still, the rule can be handy when you're looking for a rough idea. Anyone very familiar with compounding should also understand what the compound annual growth rate, or CAGR, is. It's simply a measure that shows you the annual growth rate that's in effect when a number grows and becomes a bigger number over time.
How quick was that growth? Well, plug those numbers into a CAGR calculator and you'll see: 4. The CAGR can be useful for investors when they want to see the average annual growth rate of their investments over time. With a fixed-rate investment, the average is clear -- it's the fixed rate, each year, for however many years. But investments in, say, the stock market, can grow and shrink from year to year. If you plot your portfolio's growth on a graph, it will likely be a jagged, zigzaggy line, but it will also have a compound annual growth rate.
Now that you've got the basics of compound interest and compounding in general under your belt, let's move away from bank accounts and interest and into more interesting realms, where growth can be even faster. Search for:. Use compound interest formulas Savings instruments in which earnings are continually reinvested, such as mutual funds and retirement accounts, use compound interest. Try It 8 Refer to Example 8. Licenses and Attributions. CC licensed content, Shared previously. Compound Interest Calculator.
Margarette Burnette. July 8, Initial Deposit. Investment Time Span. Estimated Rate of Return. Compound Frequency daily monthly annually. Principal Interest. Use NerdWallet to find a better bank account.
Using this compound interest calculator. Learn More. LendingClub High-Yield Savings. APY 0. Discover Bank Online Savings. Cash management accounts are typically offered by non-bank financial institutions. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Discrete compounding refers to the method by which interest is calculated and added to the principal at certain set points in time. What Is Euler's Constant? What the Effective Annual Interest Rate Tells Us The effective annual interest rate is the real return on an investment, accounting for the effect of compounding over a given period of time. Annual Percentage Yield APY The annual percentage yield APY is the effective rate of return on an investment for one year taking into account the effect of compounding interest.
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