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Compound Interest Calculator
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Date publish: 18.09.2024
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Author: Calcwizard
Compound interest is your best ally for building long-term wealth. Indeed, if you reinvest the gains your investments produce each time, they will produce more in turn. This is called the compound interest effect. To get an idea of their power, try our compound interest calculator below. It allows you to calculate the compound interest of an investment with ease.
Why use the compound interest calculator?
The compound interest effect is one of the most important aids for building long-term wealth. Many people know this, but only a few people can really imagine the long-term impact of compound interest on their financial investments.
That’s why we have designed this compound interest simulator for you, which shows you, with very few parameters, the calculation of compound interest.
It takes a lot of patience and discipline to take full advantage of the effect of compound interest. First of all, it takes some time for the system to get going. In fact, you have to reinvest the interest or dividends that you receive at each payment period. If, on the other hand, you do not reinvest them, you will only receive simple interest each year and your capital will only grow very slowly without benefiting from the effect of compound interest.
It is therefore very important to understand how this works when you invest. Our compound interest calculator is here to help you!
The compound interest simulator explained
In order not to complicate things unnecessarily, we have simplified the calculator. We do not want to help you calculate the interest on your bank savings contract to the nearest cent (we recommend programs such as Excel for this purpose), but rather to explain the effect of compound interest.
We base ourselves on the fact that the interest is paid each month and that the interest received is also reinvested each month (otherwise it would only be simple interest).
Initial capital
If you have available capital, that you have already invested or that you wish to invest, you can enter the amount in the “Initial capital” space. For example, we have entered €5,000, but you can absolutely set this figure to zero, if you want to calculate your interest without initial capital.
For example, try to do the calculation for a child for whom you would have invested €2,000 once at the time of his birth (at a rate of 6%) until he is 18, without continuing to save each month.
Monthly savings rate
The monthly savings rate is, besides the one-off payment (initial capital), the second way to invest money. You can of course make a one-off payment while saving every month afterwards.
Your personal savings rate should not be less than 10% of your net salary, it is even better if it is significantly higher. For young people, the savings rate should be much higher in any case. This is the ideal time to put money aside, as long as there are no major financial obligations.
So let’s take the previous example of the child again. Now calculate the final capital for the case where you did not make a one-off payment of €2,000 at the beginning of the period, but a monthly payment of €10 every month until the child came of age. As you can see, the final capital is much lower, even if the total sum of the payments is higher.
The earlier you invest your money, the greater the benefit of compound interest.
Savings period (in years)
This is probably the most painful point of all. Thus, the effect of compound interest takes time to bear fruit. When you are young, it is difficult to think in the long term. We have difficulty with the idea of reducing our immediate consumption to increase our future consumption.
So play around a little with the different variables (savings period and monthly savings rate) to optimize your results. For example, if you set a target amount to achieve financial freedom, you will notice that you can reach this goal more quickly by increasing your savings rate.
Annual interest rate (in percentage)
The annual interest rate that you hope to receive on your investment is the most uncertain variable in your calculation.
In the long term, however, the interest rate that you can obtain (the annual return on your investment) is much more predictable than you might initially think. Just because the stock market does badly for a few years doesn’t mean that yields and interest rates will stay low in the long term.
Change the interest rate by 1% and see how your final capital evolves. This is the most powerful tool you have at your disposal. Even if you save €100 more per month for 35 years, your final capital will be smaller than if you earn 1% more interest per year.
So it’s worth thinking about the interest rate you want to target and sticking to it year after year. The argument “I want the highest possible interest rate, every year” is likely to be detrimental to you, because it won’t allow you to develop a clear investment strategy. With the passive investment approach via ETFs (trackers), of which we are big fans, it is quite possible to generate a return of 7% per year.
We hope you find the Compound Interest Calculator useful and use it for your financial planning! We welcome your comments and additions. Also, let us know what other tools you might find useful. If you have any suggestions on how we can improve the Compound Interest Calculator, please leave us a comment.
Try the Calculator
Enter your investment details below to see how compound interest can grow your wealth:
| Principal Amount | Annual Interest Rate | Time (Years) | Compound Frequency | Future Value |
|---|---|---|---|---|
| $1,000 | 5% | 10 | Annually | $1,628.89 |
| $2,000 | 4% | 5 | Quarterly | $2,208.16 |
| $500 | 6% | 15 | Monthly | $2,078.93 |
| $10,000 | 3% | 20 | Annually | $18,115.58 |
FAQ – Frequently Asked Questions
What is compound interest?
Compound interest is the interest you receive on your interest. The principle is quite simple: if a certain interest rate increases your initial capital, this same rate will apply to a larger capital during the following period. The effect of compound interest increases over time.
How to benefit from the effect of compound interest?
To benefit from compound interest, you must reinvest the gains you receive so that they can produce more in turn. If you invest money in a savings account, do not withdraw the interest received. If you invest via an ETF, choose a capitalizing ETF. In both cases, the effect of compound interest increases in the long term. Use our compound interest calculator to get an idea.
How to calculate compound interest?
The easiest way to calculate compound interest is to use our compound interest calculator. To do this, simply enter the initial capital, your monthly savings rate, the investment/savings period and the expected interest rate.
