Growing Your Investments With Compound Interest
After releasing the Free Compound Interest calculator, there have been a lot of visitors here who are searching for compound interest calculators or arriving from the various download sites that are hosting the Free Compound Interest Calculator.
So, I thought that I might expand a little on how we can use Compound Interest to our advantage when wanting to maximize our investments.
First of all, let’s take a look at how the compound interest calculation works.
Let’s say that we buy $1,000 worth of an investment that will pay us a rate of 15% per year.
At the end of Year 1, we will have the initial investement (starting capital) of $1000, and we will also have an additional sum of $150 that was earned from the interest. So,
Year 1 Total = $1,150.00
So now our effective starting capital for year 2 is $1,150. Therefore at the end of year 2 we have our starting capital PLUS an additional interest amount of $172.50. So,
Year 2 Total = $1,322.50
And at the end of year 3 we will still have this amount, and we shall also have gained another $198.38 or interest. Which gives us,
Year 3 Total = $1,520.88
Watching our $1000 investment grow at a rate of 15% per year may not seem like a very interesting thing to do, so lets fast forward 10 years.
| Year | Capital | Interest | Total |
|---|---|---|---|
| 1 | $1,000.00 | $150.00 | $1,150.00 |
| 2 | $1,150.00 | $172.50 | $1,322.50 |
| 3 | $1,322.50 | $198.38 | $1,520.88 |
| 4 | $1,520.88 | $228.13 | $1,749.01 |
| 5 | $1,749.01 | $262.35 | $2,011.36 |
| 6 | $2,011.36 | $301.70 | $2,313.06 |
| 7 | $2,313.06 | $346.96 | $2,660.02 |
| 8 | $2,660.02 | $399.00 | $3,059.02 |
| 9 | $3,059.02 | $458.85 | $3,517.87 |
| 10 | $3,517.87 | $527.68 | $4,045.55 |
At the end of 10 years we know have a capital sum of over $4,000 - which represents a 400% return on investment. Also, for year 10, we have made over $500 dollars in interest, which is more than 50% of our initial investment.
Looking at the long term it is possible to see the power of compound interest. Smarter investors will find that by adding to their investment each year, they will be able to grow the investment even quicker.
If you fancy getting more technical on the subject, then check out the Wikipedia Compound Interest page.
Update : We now also have an Online Compound Interest Calculator that is free to use to. You can check it out here.
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