Compound Interest Calculator
Formula: A = P (1 + r/n)nt
A = amount of money earned at end of investment
P = principal amount (starting amount of money)
r = annual interest rate
t = number of years the the investment will last
n = number of times the interest will be compounded (per year)
What is compound interest?
Compound interest allows you to earn interest on both your principal (the money you deposited) and the interest you've already earned.
First, here's how it works with simple interest. Say you have an account with $5000 earning 2% interest annually. At the end of the year you have $5,100 in your account. You only earned interest on $5000, even though your money increased by $8.33 cents each month. Compound interest accounts for that increase.
Now look at the same account with $5000 earning 2%, but this time it is compounded monthly. The first month you earn $8.33. The second month you include that increase into your interest calculation, which gives you $8.34. The interest earnings increase exponentially throughout the year, giving you a total balance of $5100.92. You made 92 cents more with compound interest. So, this clearly isn't a big deal unless you're dealing with huge sums of money.