James by saving $1,000 initially, then adding $600 on a monthly basis, with an average yearly interest rate of 10%, you will have $1,265,960 in 30 years time. With an average yearly inflation rate of 3.7% this will be equivalent to $425,654 today. How your savings increase in value is shown in the graph and table. Please note the image displayed below takes account of inflation.
James, you will be able to afford:
The future equivalent of
a Bar worth over $350,000
by the time you are 57 years old
How to get the most out of the Compound Interest Calculator
When using the Compound Interest Calculator we recommend you play about with the numbers you enter. This is because a few small changes can result in massive gains or losses. The best items to manipulate are:
- Interest rate
- Number of years
This is because by increasing the interest rate you do not have to physically do more work. Whereas if you increase your initial or monthly savings the additional money will need to come from somewhere.
For example if you invested $200 each month at an annual interest rate of 10%. After 30 years you will have $416,171. However, if you had invested it for the same length of time but at annual interest rate of 12% you would have $616,846. This is 48% more than before!
In regards the number of years, the longer you invest for the more time your savings have to compound.
For example if you invested $200 each month at an annual interest rate of 10%. After 30 years you will have $416,171. However, if you had invested it for 50 years you would have $2,944,696. This is 600% more than before!
This gap only gets bigger the longer you invest. So as you can see compound interest benefits the long term investor. Try these out for yourself on the Compound Interest Calculator.
What can the Compound Interest Calculator be used for?
The calculator can be used to work out:
- How much you need to save to hit a future financial target
- How much interest you need to earn to hit a future financial target
- How long it would take to become a millionaire
- How inflation will affect your savings and investments
- How much your business profit needs to grow year on year to hit a financial target
It can also be used to teach the benefits of long-term Saving and Investing.
How does the Calculator work
If you have already used the Compound Interest Calculator you are probably wondering why the numbers increase so fast. This is due to Compound Interest. Compound Interest is when you earn interest on top of interest.
E.g. you invest $100 in a bank account that pays a yearly interest rate of 10%. After one year your investment would have grown to $110. Now you would expect that after two years it will have grown to $120, but you would be incorrect. The 10% interest is applied to the $120 you have in the account. Therefore, you end up with $121.
Heres the amazing part. Compound Interest benefits the long term investor. Therefore if you leave that money in an account for 50 years your $100 will grow to over $11,000! That's 100 times more than you physically put in. This is the power of compounding. Try it out for yourself on the Compound Interest Calculator above.
Compound Interest Calculator formula
The Compound Interest Calculator above utilises several formulas to calculate the value of your future investments. The most useful formula for Compound Interest is as follows:
F = I (1 + R / N)^Nt
- F = Final amount
- I = Initial amount invested
- R = Interest rate as a decimal
- N = Number of times interest is compounded each year
- t = Number of years
Below is how the calculation will look if you invest $2000 at an interest rate of 7% for 12 years. In this example the interest is compounded twice annually.
$2,000 (1 + 0.07 / 2)^(2*12)
This will give you $4,567. Try it for yourself on the Compound Interest Calculator.
The Compound Interest Rule of 72
Unfortunately, you wont always have a Compound Interest Calculator to hand. Thankfully there is a quick way you can work out how long a Compound Interest rate will take to double your money.
Einstein calculated that if you have an interest rate of 10% it will take 7.2 years to double your money.
So, if you have an interest rate of 8% and you need to know approximately how long it will take to double your money you should divide 72 by 8. This will give you 9 years. Try this for yourself on the Compound Interest Calculator by entering:
- $2000 in the initial amount saved box
- 0 in the monthly savings box
- 8 in the yearly interest rate box
- 0 in the inflation rate box
- 9 in the number of years box
Finally select the 'Calculate' button.
How to take Account of Inflation
If you have been using the inflation rate option on the Compound Interest Calculator you will have noticed the huge effect this can have on your investments. Inflation is the enemy of interest and can be defined 'the gradual rise in prices over time'. This means for instance that $20 today will buy you fewer packets of crisps than $20 would have 30 years ago.
The effects of inflation can be calculated by using the following formula:
J = M (1 + L)^-t
- J = Real value of money once inflation has been accounted for
- M = Money
- L = Inflation rate as a decimal
- t = Time in years
For example you need to know what $2000 today will really be worth in 30 years time when there is an average yearly inflation rate of 2%. This would be calculated as follows:
$2,000 * (1 + 0.02) ^-30
This gives you $1,104 dollars.
Therefore, with a 2% yearly inflation rate $2,000 in 30 years time will only buy you the equivalent of what $1,104 dollars will buy you today. Try this for yourself on the Compound Interest Calculator.
Is Compound Interest taught in Schools?
Unfortunately, it is not always taught in schools. This is a shame because to take full advantage of its benefits you have to start investing from a young age.
For Instance if you invested $100 each month at a 10% annual interest rate, after 30 years you would have $208,086. Yet if you only invested for 10 years you would only have $20,161. This is a massive difference and it clearly highlights the benefits of starting early.
Try this for yourself on the Compound Interest Calculator.
Compound Interest Lesson Plan
We actively encourage the use of our Compound Interest Calculator within schools and have created a free Compound Interest Lesson Plan for you to use.