Interest Calculator

About Interest Calculations

What is Interest?

Interest is the cost of borrowing money or the reward for saving it. When you borrow money, you pay interest. When you save money in a bank or invest it, you earn interest.

Interest is typically expressed as a percentage rate over a specific period, usually a year, known as the Annual Percentage Rate (APR) or Annual Percentage Yield (APY).

Simple Interest

Simple interest is calculated only on the initial principal amount. It does not take into account the accumulated interest over time.

Formula:

Interest = Principal × Rate × Time

Where:

Principal is the initial amount of money
Rate is the interest rate (in decimal form)
Time is the time period (in years)

Compound Interest

Compound interest is calculated on the initial principal and also on the accumulated interest over previous periods. This is often described as "interest on interest".

Formula:

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

Where:

A is the final amount
P is the principal (initial investment)
r is the interest rate (in decimal form)
n is the number of times interest is compounded per period
t is the time the money is invested for (in years)

Importance of Compounding Frequency

The frequency at which interest is compounded can significantly affect the final amount. The more frequently interest is compounded, the more interest you earn.

Common compounding frequencies include:

Annual: Interest is calculated once per year
Semi-annual: Interest is calculated twice per year
Quarterly: Interest is calculated four times per year
Monthly: Interest is calculated 12 times per year
Daily: Interest is calculated 365 times per year

Frequently Asked Questions

What is the difference between simple and compound interest?

Simple interest is calculated only on the initial principal, while compound interest is calculated on both the principal and the interest already earned.

Which is better, simple or compound interest?

For investors and savers, compound interest is generally better as it yields higher returns over time. For borrowers, simple interest results in lower repayments.

How does compounding frequency affect my returns?

The more frequently interest is compounded, the higher your returns will be, all other factors being equal. For example, daily compounding will yield higher returns than annual compounding.

What is the Rule of 72?

The Rule of 72 is a simplified way to estimate how long it will take for an investment to double at a given interest rate. Simply divide 72 by the interest rate. For example, at 6% interest, an investment will double in approximately 72/6 = 12 years.

How can I maximize my interest earnings?

To maximize interest earnings: invest early to benefit from more compounding periods, choose accounts with higher interest rates, select accounts with more frequent compounding, and avoid withdrawing money early.