How To Calculate Compound
We prefer to think of compound interest as a reverse credit card. We all know the problem with credit card debt; the interest charged makes it difficult to pay off the original, or principal, debt. Well the benefit of compound interest is that it can help you make money the same way credit card company’s do. In this article we will teach you how to calculate compound interest, and show some examples of how you can use it to your advantage.
Compound Interest Formula
Keep in mind when using this formula for compound interest that it is an annual calculation. The formula for compound interest looks fairly complicated, but its actually quite simple. Lets explain the variables in the compounding formula:
A – Amount (The future value of the loan)
P- Principal (The initial deposit amount)
R- Rate Of Interest (The annual interest rate)
N- Number of Compounds Per Year
NT- Time In Years (total years the money is invested for)
When looking at the number of compounds per year, remember you can have interest compounded monthly, semi annually, quarterly, or annually.
The Gage Canadian dictionary defines compound interest as, “the interest paid on both the original sum of money borrowed and on the unpaid interest that has accumulated.” Sound like something you’ve heard before?
Lets look at compound interest a little closer
Here is an example of how to calculate compound interest with a few numbers rounded off to make the calculations easier. You have $1000 dollars and open a savings account at a modest 3 percent per annum interest rate. That is you lend the bank $1000 dollars and they pay you 3 percent interest on this amount of money annually. It’s a far cry from the 19.5 percent a credit card company charges, …