How To Calculate Compound Interest
August 19th 2008 16:50
I came across this article from InvestorTrip, How to Calculate Compound Interest by Tarik. He quotes Einstein:
Tarik gives us the formula to figure out what an amount today will be worth in 25 years at a specific interest ratefor example:
Unless you have a calculator, doing the math is boring, repetitive and subject to error. Laid out the formula looks like this $25 X 1.09 X 1.09 X1.09......(25 times) = $215
Here's a much simple way using The Rule of 72.
72 divided by Nine percent interest rate equals 8. That means, it takes eight years to double. Divide 25 years by eight equals 3 . That means compounding at 9%, money would double 3 times. So take the $25 used in the example, we get 25 X 2 = 50 |(1); 50 X 2 = 100 (2); 100 X 2 = $200 (3). Close enough!
Albert Einstein referred to compound interest as the “8th wonder of the world.” It’s the same powerful concept that keeps millions of people in debt to their creditors, yet also produces millions of dollars when practiced over a long period of time.
Tarik gives us the formula to figure out what an amount today will be worth in 25 years at a specific interest ratefor example:
Compound Interest Formula
FV = PV (1 i)^n
FV= future value
PV= present value
i= interest rate
n= # of years
For this example, we’ll assume that $25 earned a 9% annual return (the average between historical small cap stock returns and long term bond yields) over the course of 25 years. Now, we plug and chug the numbers into the compound interest equation:
FV = $25 (1.09)^25
The result of future value is $215.
FV = PV (1 i)^n
FV= future value
PV= present value
i= interest rate
n= # of years
For this example, we’ll assume that $25 earned a 9% annual return (the average between historical small cap stock returns and long term bond yields) over the course of 25 years. Now, we plug and chug the numbers into the compound interest equation:
FV = $25 (1.09)^25
The result of future value is $215.
Unless you have a calculator, doing the math is boring, repetitive and subject to error. Laid out the formula looks like this $25 X 1.09 X 1.09 X1.09......(25 times) = $215
Here's a much simple way using The Rule of 72.
72 divided by Nine percent interest rate equals 8. That means, it takes eight years to double. Divide 25 years by eight equals 3 . That means compounding at 9%, money would double 3 times. So take the $25 used in the example, we get 25 X 2 = 50 |(1); 50 X 2 = 100 (2); 100 X 2 = $200 (3). Close enough!
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