The compound interest formula is a powerful tool that can help you grow your wealth over time. By understanding how compound interest works, you can make informed decisions about your investments and achieve your financial goals.
Compound interest how to calculate
Compound interest formula
A = P(1 + r)^t
Where:
- A is the future value of the investment
- P is the principal amount
- r is the annual interest rate
- t is the number of years
If you can only invest a small amount each year. use this formation to calculate
A = P (1 + r)^(t) + C * [(1 + r)^(t) – 1] / (r)
C = additional annual contribution
Example
P = $100,000 (principal)
r = 10% = 0.10 (annual interest rate in decimal)
n = 1 (compounded once per year)
t = 20 (20 years)
C = $0, $100, $300, or $500 (additional annual contribution)
Let’s calculate Additional investment :
+ $0 each year: The final amount (A) = $100,000 * (1 + 0.10)^20 + $0 * [(1 + 0.10)^20 – 1] / 0.10 = $672,749.99
+ $1000 each year: The final amount (A) = $100,000 * (1 + 0.10)^20 + $1000 * [(1 + 0.10)^20 – 1] / 0.10 = $730,025
+ $3000 each year: The final amount (A) = $100,000 * (1 + 0.10)^20 + $3000 * [(1 + 0.10)^20 – 1] / 0.10 = $844,575
+ $5000 each year: The final amount (A) = $100,000 * (1 + 0.10)^20 + $5000 * [(1 + 0.10)^20 – 1] / 0.10 = $959,125
| Additional Investment per Year | Final Amount after 20 years |
| $0 | $672,750 |
| $1000 | $730,025 |
| $3000 | $844,575 |
| $5000 | $959,125 |
For this formula, You can see keys of compound interest formula
- amount of money you invest
- interest rate or return rate
- Time
If you want to maximize power of compound interest
Start early
The most important factor is Time in compound interest. The earlier you start investing, the more time your money has to grow. Thus you must be patience.
Invest in high-growth assets.
When you invest, you want to choose assets that have the potential to grow at a high rate. High-growth assets like stocks and real estate can fluctuate in value. This means that you might not always make money on your investments, and you could even lose money. Therefore, it’s important to understand your own risk tolerance and invest accordingly.
Amount of money you invest
The principle amount is the initial amount of money that you invest.
It is important because it is the foundation on which compound interest is built.
The more money you invest, the more interest you will earn, and the faster your money will grow.
Invest regularly
Even if you can only invest a small amount each year, it will add up over time.
The key is to invest regularly and stay consistent with your contributions.
Don’t touch your investment
When you withdraw your money before it has had a chance to grow, you are essentially missing out on the potential gains that could have been earned. For example let’s say you invest $10,000 at an annual interest rate of 5%. If you leave your money invested for 10 years, it will grow to $16,289. However, if you withdraw your money after just 5 years, it will only grow to $13,000.
As you can see, the difference between $16,289 and $13,000 is significant. This is because the money that you earn in interest in the first 5 years is then reinvested and earns interest itself in the remaining 5 years. This is the power of compound interest.
So, if you want to maximize your investment returns, it is important to resist the temptation to withdraw your money before it has had a chance to grow. The longer you leave your money invested, the more money you will make in the long run.
