Compound interest is a fundamental concept in wealth building, where your investment earns interest not only on the initial principal but also on the accumulated interest over time. This “interest on interest” effect can significantly boost your savings, especially over long periods. Understanding and leveraging compound interest can be a game-changer in achieving your financial goals.
Investment details
This example demonstrates how interest is calculated not only on your initial deposit but also on the interest accumulated over time, showing the powerful effect of compound interest.
Instructions:
- Enter Initial Principal: The amount of money you start with.
- Estimated Rate of Return (%): The annual return rate you expect to earn on your investment.
- Contribution Frequency: How often you plan to add to your investment (e.g., monthly, annually).
- Number of Years: The total period over which you plan to invest.
- Additional Contribution: The amount you will contribute at each frequency interval.
Example Calculation
Let’s say you want to invest $10,000 in a savings account with a 5% annual yield, compounded daily. You don’t plan to add additional funds after your initial deposit. Here’s how you would use the calculator:
- Initial Deposit: $10,000
- Contribution Amount: $0 (since no additional contributions will be made)
- Contribution Frequency: Ignore this field
- Years of Growth: 1 (start with 1 year, then increase to see longer-term growth)
- Estimated Rate of Return: 5%
- Compound Frequency: Daily
Example Results:
- After 1 Year:
- Interest Earned: $512.67
- Total Balance: $10,512.67
- After 2 Years:
- Interest Earned in Year 2: $538.96
- Total Interest Earned Over 2 Years: $1,051.63
- Total Balance: $11,051.63
- After 10 Years:
- Total Interest Earned: $6,486.65
- Total Balance: $16,486.65
The hypothetical example is for illustration purposes only, not intended to be a recommendation or tax/legal advice.
Watch our video: “The Power of Creating Wealth Using Compound Interest – Everyone, Especially The Young Should Know”
Learn why compound interest is essential, especially for young investors, and how you can harness its power to grow your wealth. Don’t miss out on this valuable knowledge that can set you on the path to financial success.
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