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Using a Compound Interest Calculator Compound interest means that the interest is paid not just to the principal balance of your account but also, to other interest that it has accumulated previously. Compound interest has the capability of producing massive gains on your investment over a set period of 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. 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. And with this being said, to be able to calculate simple interest, you just have to multiply your rate of interest by number of years that you’re considering and your 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. The interest stays the same every after year in simple interest.
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On the other hand, in compound interest, 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. But as the second year of your account ends, the interest is then calculated as 4 percent of new balance or 416 dollars which gives you a total of 10816 dollars. This process will be repeated for the following years.
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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.