If you’ve ever heard the term “compound interest” and have no idea what it means, you’re not alone. You will be happy to know that it is actually a simple concept. To put it very simply, her interest on interest.

If you’ve ever wondered how much interest you really earn on your account, check out the MU30 Compound Interest Calculator.

Use of the compound interest calculator

The compound interest calculator can be used to provide you with two important information about your investment:

  • The total value of your investment at the end of the investment term.
  • How much interest you earn over the entire term of the investment.

And the Calculator can not only provide you this information about a specific investment, but you can also use it to compare multiple investments to determine which one is the best to choose.

The calculator requires you to enter six pieces of information:

  • Initial investment – Enter the amount you start with.
  • Deposit amount – This is the number of periodic deposits you plan to add to your investment. Even if it’s not a certain amount every time, use the average of what you expect to contribute over the life of the investment.
  • Deposit base – Enter the frequency of your periodic deposits. It can be annual, semi-annual, quarterly or monthly. If you plan to make weekly deposits, simply multiply the deposit amount by 4,333 and set the frequency to monthly.
  • Interest – Enter the return you expect on your investment over the entire term.
  • Interest has worsened – Enter the compounding frequency to be provided by the bank or other financial institution where your investment is held. The calculator gives you the choice between annual, semi-annual, quarterly, monthly and daily.
  • Couple of years – Use the slider to enter the number of years you keep for that particular investment. You can enter anywhere from a year to 35 years.

Once the required information is entered, click the “Calculate” button and both the total value of your investment at the end of the term and the interest you earn over the life of the investment will be displayed.

You can play with the calculator and run scenarios for various investments. For example, you can change the information entered on any of the six inputs and see how it will affect the outcome of your investment.

What is compound interest?

The simplest description of compound interest is that it not only reflects the interest earned on the principal of your investment, but also the interest you earn on the accrued interest in your investment.

The advantage of compound interest is that you will earn more interest on your investment through compound interest than through simple interest. And unfortunately, you also pay more interest on loans you owe. Lenders almost always use compound interest when calculating loan payments.

Under a simple interest rate plan, you can invest $ 10,000 for a year at an interest rate of 5%. At the end of a year, you will receive $ 10,500 – $ 10,000 for your original principal, plus $ 500 in interest earned.

If you make the same investment now, but add monthly formulations to the arrangement, you will receive $ 10,511.62 at the end of a year. $ 10,000 represents your original principal investment, $ 500 is a simple interest, and $ 11.62 is the interest you earned on your simple interest. (Yes, I used the compound interest calculator to calculate this investment!)

How does compound interest work?

Not surprisingly, the more often the preparation frequency occurs, the higher the interest you will earn on your investment. For example, in the above example, I used monthly compounding. But if the compound frequency is daily – which is common with bank investments – the interest earned would be even higher.

Therefore, you should always prefer interest-bearing investments that go together most often. Daily is usually the best option, while the lowest return annually.

In the example above, I looked at the effect of compounding over a year. That is a very simple example and one that does not adequately demonstrate what curating interest can do. So let’s take a longer look at compounding.

You have two investments, investment A and investment B. The conditions of each are as follows:

  • Investment A: Invested $ 10,000 at 5% over 20 years, compounded annually.
  • Investment B: Invested $ 10,000 at 5% over 20 years, compounded daily.

At the end of 20 years, the investment return will look like this:

  • Investment A: $ 26,532.98 consisting of $ 10,000 in original principal and $ 16,532.98 in interest earned over 20 years.
  • Investment B: $ 27,180.96 consisting of $ 10,000 in original principal and $ 17,180.96 in interest earned over 20 years.

As you can see in this example, Investment B earned an extra $ 647.98 over 20 years, and all I did differently was choose an investment that goes together daily instead of annually.

That makes it just about the easiest extra money you’ll ever earn in your life!

The “rule of 72”

This is a favorite rule of accountants, but it can also be a great tool for ordinary mortals. The Rule of 72 gives an approximation of how long it takes for an investment to double in value based on a given interest rate.

It works by dividing 72 by the return on your investment.

Let’s say you invest $ 10,000 at 6% and you want to know how long it will take to double your investment. By dividing 72 by 6%, you get 12. That means it takes 12 years for the value of your investment to double at that interest rate.

The Rule of 72 doesn’t help you with more complicated calculations, but getting the answer to “when will my investment double” is a common question among investors. And if you ever have that question with an investment that you are considering or already own, you can use the rule to find the answer yourself.

How to use compound interest to your advantage

Compound interest is one of your best friends on the investment side. But it is also an enemy if you borrow money. That’s because it works the same in both directions, except you’re on the receiving end of the interest equation with an investment. With a loan, you are on the paying side, which means that the interest will cost you more.

There are ways to play compound interest when it comes to both investments and loans.

To use compound interest to your advantage in investments:

  • Choose investments with the most frequent compositions possible; daily or continuous are the best choices.
  • Invest as soon as possible; interest rate comparison works best in the longer term.
  • Let ‘APY’ be your guide: that’s the annual percentage of revenue, which reflects the interest you earn, including compound costs. It is the best way to compare one interest-bearing investment with another.

To use compound interest to your advantage with loans:

  • Pay close attention to ‘APR’ – that is the annual percentage of a loan. It not only reflects the compound interest paid to the lender, but also any fees you pay in connection with getting or keeping a loan. In the lending sector, fixed interest rates, such as 17.99%, don’t matter as much as an APR of 19.12%. The latter is the effective rate you really pay.
  • Keep your loan terms as short as possible. Just as compound interest works to your advantage in the longer term when investing, it works against you when it comes to borrowing.
  • Making additional principal payments does not lower your APR, but it does decrease the amount of interest you pay over the term of the loan, as well as the term of the loan.

Once you understand how compound interest works, you can become your friend whether investing or borrowing.

Overview

When you earn compound interest, you earn interest on your interest. So, if you have a high-return savings that yields compound interest every day, you will earn much more than someone with a bank account that has compound interest every day.

Compound interest is just about the easiest way to earn your money alone!

Read more: