All About Compound Interest Calculators
When it comes to compound interest, it means that the interest is paid not just to principal balance of your account but to other interest it has accumulated previously. Compound interest can produce massive gains onto your investment over a long period time. This is actually among the many reasons why this concept of investment has become something that numerous investors are so eager and interested to understand.
Whether you believe it or not, there are many ways to which interests can be calculated and these are simple and compound. With regards to simple calculation of interest, it’s easier to be done because like what the name suggests, simple interest indicates that the principal balance is what being calculated. And with that said, to be able to calculate the simple interest, you simply need to multiply your rate of interest by the number of years that you are considering as well as your principal balance.
So to give you a quick example of how simple interest calculation works, assuming that you buy a bond for 1000 dollars that pays 5 percent simple interest for 30 years, you are going to receive 50 dollars annually for the next 30 years as interest payment, which is a total of 1500 dollars in interest. The interest stays the same every after year in simple interest.
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As for compound interest on the other hand, what is meant by this is that, the interest is paid on principal balance and any interest that it has accumulated previously. As a quick example, if you have made an investment of 10000 dollars on sometime with compound interest of 4 percent, then you will be receiving 400 dollars in interest after the first year, giving you a total amount of 10400 dollars. At the end of second year however, the interest is calculated as 4 percent of the new balance or 416 dollars which gives you a total of 10816 dollars. For the subsequent years, the process will be repeated.
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With regards to the formula in computing compounding interest, it is going to be A = P (1+r)t in which A is the ending amount of money, while P is the principal and r is the interest rate that’s expressed as decimal so 5% is equivalent to .05 and t is the number of time in years.
You are going to find compound interest calculators in the internet that are intended for the purpose of getting an estimate and not for financial advice or planning. As with any other tool, it’s only as accurate as assumptions it is making as well as the data that it has and something that you shouldn’t totally rely on as substitute for a tax professional or a financial advisor.