How does compound interest work?

When you deposit money into a savings or investment account, the bank or financial institution will pay you interest on that deposit. This interest is added to your balance, and the next time interest is paid, it is calculated on the new, higher balance. This process continues, with interest being added to the balance and then earning interest on itself. Over time, this can lead to significant growth in your account balance.

Illustration of a Compound Interest Calculator

For example, if you were to deposit R10,000 into a savings account with an annual interest rate of 5%, after one year your balance would be R10,500. But if you leave that R10,500 in the account for another year, earning interest at the same rate, your balance would grow to R11,025. By year three, your balance would be R11,576.25, and so on.

How to use the compound interest calculator:

To use the compound interest calculator, you will need to know the following information:

• • The initial deposit or investment amount (in South African Rands)

• • The annual interest rate (in decimal form)

• • The number of times interest is compounded per year

• • The number of years you plan to save or invest

• • The regular contributions (if any)

You can enter this information into the calculator and it will give you an estimate of how your savings or investment balance can grow with compound interest.

The Formula

The formula for calculating compound interest with regular contributions is:

A = P(1 + r/n)^(nt) + C(((1 + r/n)^(nt) – 1) / (r/n))

Where: A = the future value of the investment/loan, including interest P = the principal investment amount (the initial deposit or loan amount) r = the annual interest rate (decimal) n = the number of times that interest is compounded per year t = the number of years the money is invested or borrowed for C = the regular contribution amount

The formula is used to calculate the future value of an investment or a loan by taking into account the compound interest and regular contributions. The formula uses the following components:

• • The principal investment amount (P) which is the initial deposit or loan amount.

• • The annual interest rate (r) which is the percentage of interest earned on the investment or loan.

• • The number of times that interest is compounded per year (n) which is how often the interest is added to the balance.

• • The number of years the money is invested or borrowed for (t) which is the duration of the investment or loan.

• • The regular contribution amount (C) which is the amount of money that is added to the investment or loan at a regular intervals.

The formula uses mathematical operations like +, -, *, /, and ^ to calculate the future value of the investment/loan.

For instance, if you have an investment of R10,000, an annual interest rate of 5%, compounded annually, and you add R1,000 every month, after 10 years the future value of your investment would be R243,566.

Please let me know if you have any other question or if there is any other information I can provide to help you.

Conclusion

In conclusion, compound interest is a powerful tool that can help your savings and investment accounts grow significantly over time. By using our compound interest calculator, you can see for yourself how your money can grow with compound interest and plan accordingly. It’s important to keep in mind that this is an estimate and actual results may vary depending on the interest rate, frequency of compounding and regular contributions.