Compound interest formula
The formula that is used to calculate compound interest is A = P(1+r/n)^nt with:
A = ending value. P = starting value. r = interest rate. n = number of times interest is compounded. t = time.
What is compound interest?
Compound interest refers to the interest that you not only earn on your original investment, but the interest you earn on the interest that builds as you leave your investment to grow over time.
As an example, imagine that you invest $1000 for two years and each year it earns 10% with any of the proceeds from investing being reinvested. In the first year you would earn $100 on your investment calculated as $1000 * 10% = $100. This would bring your total investment to $1100. In the second year you would earn $110, more than the first! As the proceeds are now calculated as $1100 * 10% = $110. Making your total investment value $1210. This compounding effect allows your investment to grow even faster the longer you leave it invested.
Does investing become easier after the first $100,000?
It is often said that the first $100,000 is the hardest to reach with the achievement of this milestone making each subsequent $100,000 easier. The reason for this is the impact that compounding has on your investments when you reach the $100,000 milestone.
While the power of compounding works regardless of the amount, its impact is much more noticeable after you reach that $100,000 milestone. The returns from compounding once you reach $100,000 will also assist you in reaching $200,000 much faster than it took to reach the initial $100,000.
How to use this compound interest calculator
This calculator helps you see how your investment will grow over time with compound interest. You are able to use this calculator with only an initial investment to see how much that will grow over a period of time or add in regular additions to see how effective your investment plan is.
You are also able to work backwards to see how much you would need to invest in order to hit a specific target that you have in mind. It is important to understand the impact of inflation on your investment over this time frame to see what the real purchasing power of your investment will be in the future.
How to maximize the impact of compound interest
If you want to maximize the impact that compound interest has on your investments in Canada, there are a few investment tools that you can use to help. To ensure that your investments do not decrease each year you can use tax advantaged accounts to make your investments. These accounts include the Tax-Free Savings Account (TFSA), First Home Savings Account (FSHA) as well as Registered Retirement Savings Account (RRSP).