How to Use a Compound Interest Calculator
Compound interest is the addition of accrued interest to a principal investment over a specified time period. The interest from compounding can increase the future value of the investment substantially. By using a compound interest calculator you can see how compounding can affect your investments.
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Instructions
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1
Learn to use a compound interest calculator by knowing some basic terminology. The three main terms you need to know are principal (initial investment amount), rate (the annual percent of interest) and years (number of years for the investment).
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2
Locate an online compound interest calculator to see the effect of compounding on your investment. There are many online calculators like this one (see Resources).
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3
Use the calculator from Step 2 and input the starting principal on line 1, the interest growth rate on line 2, and the years on line 3.
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4
Enter 10,000 for the principal, 5 for the interest rate and 10 for the years on each line respectively and use the online calculator to see how this works.
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Press the "Calculate" button and you should get the future value of the investment (FV) as $16,289.
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6
Realize that you can also calculate periodic compound interest (yearly, quarterly, monthly and daily) with this online calculator (see Resources).
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7
Know that you can calculate compound interest with a formula and a hand calculator if you are unable to use an online calculator. The formula is P x(1 + r/n)^ Yn where P = principal, r = rate, n = number of times per year for interest compounding and Y = the number of years. For the example in Step 4, n = 1 so FV = P x(1+r)^ Y. You should get the same answer as in Step 5 if you use a hand-held calculator. You can also use this formula to calculate periodic compound interest.
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Tips & Warnings
Note that in Step 7, Yn and Y in the formulas P x(1 + r/n)^ Yn and P x(1+r)^ Y are exponents when you do the calculations. Realize that you input the rate (r ) of 5 as 5/100 or .05 because interest rates are in percents for the formula.
