The Beginner’s Guide to Finances

What Is A Compound Interest Calculator? Compound interest means that the interest is paid not just to principal balance of account but to other interest that it accumulated previously as well. Compound interest can produce massive gains onto your investment over a long period time. And this is exactly the main reason why this concept of investing is something that many different investors are so eager and interested to understand. The truth is, there are 2 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. Having said that, in order to calculate the simple interest, you only need to multiply your rate of interest by the number of years that you consider and the principal balance too. As a quick example to how simple interest calculation works, say that you have bought 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. In simple interest, the interest stays the same every after year.
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In compound interest on the other hand, this means that the interest is paid on principal balance and any interest that it has accumulated previously. To give you an example, if you’ve invested 10000 dollars on sometime with a compound interest of 4 percent, you’re going to receive 400 dollars in interest after the first year which will give 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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For the formula in computing compound interest, it will 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. There are compound interest calculators available online that are meant primarily 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.