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Using a Compound Interest Calculator When it comes to compound interest, it means that the interest is paid not just to principal balance of your account but to other interest it has accumulated previously. Compound […]

Using a Compound Interest Calculator When it comes to compound interest, it means that the interest is paid not just to principal balance of your account but to other interest it has accumulated previously. Compound interest can produce massive gains onto your investment over a long period 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. Whether you believe it or not, there are many 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. With regards to simple interest, the interest will stay the same year after year.
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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. For instance, if you have invested 10000 dollars on sometime with a compound interest of 4 percent, then you are going to receive 400 dollars in interest after the first year which gives you a total amount of 10,400 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 is repeated for the following years.
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As for the formula in computing compound interest, it is 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. Much like other tools, this is just as accurate as the assumptions it is making and the data it has and therefore, this is something that you must not heavily rely on as substitute for a tax professional or a financial advisor.