Question 1

What is compound interest?

Accepted Answer

Compound interest is interest that builds on both your initial investment and the interest you earn. It's often referred to as 'interest on interest'.

Compound interest is calculated at regular intervals, such as monthly, quarterly or annually. 
    
    You may also come across a concept known as 'continuous compounding', whereby interest is constantly compounding. However, this isn't typically applied to financial products like bank accounts and superannuation.

Question 2

How can I earn compound interest?

Accepted Answer

There are numerous avenues that let you earn compound interest. Your options include:

Bank accounts, particularly savings accounts

Term deposits

Your superannuation account

The share market

Real estate, where the value of a property consistently appreciates or income from a sale or renting out the property is reinvested

Compound interest also works on credit cards and high-interest loans – meaning interest is compounded on the outstanding amount, which may result in you paying a higher amount of interest if you don’t pay down your loan.

Question 3

What are the benefits of using the Compound Interest Calculator?

Accepted Answer

Pearler's Compound Interest Calculator gives you an estimate of how much your wealth could grow over the long term.

By using the Calculator, you can get an idea of the amount to invest (initially and at regular intervals) to reach your financial goals, and how long the process could take.
    
    And, by playing around with the calculator and plugging in different amounts, you can also see how different variables might affect your wealth.
    
    The Compound Interest Calculator is designed to be incredibly easy to use. This means you don't have to figure out complex calculations yourself and can see your results instantly, even if you want to tinker with different variables.

Question 4

Who should use the Compound Interest Calculator?

Accepted Answer

Anyone looking to invest their money can use the Compound Interest Calculator.

That being said, compound interest is best applied to long-term investments. It can take several years for investments to achieve exponential growth – usually, about 30.
    
    This is why you may not notice significant growth if you set your investment period to only a few months.

Question 5

Is the Compound Interest Calculator accurate if I am using an average interest rate?

Accepted Answer

The Compound Interest Calculator is largely dependent on a set of assumptions - including the interest rate.

Given the changeable nature of interest rates and the fact that they can vary widely between each financial institution, it's difficult to provide an accurate prediction of actual interest rates.
    
    However, the Compound Interest Calculator lets you plug in an average annual rate to give you a projection of how your wealth could grow.
    
    Once again, this is why it's important to treat the resulting figure as an estimate, not a prediction of your actual wealth.

Question 6

How do I calculate the compound interest without a calculator?

Accepted Answer

If you want to calculate compound interest yourself, you can use the compound interest formula: A=P(1+r/n)^nt.

'A' is the total amount.
    
    'P' is your principal or your initial investment.
    
    'r' is the annual interest rate as a decimal.
    
    'n' is the interval that compound interest is calculated each year.
    
    't' is the investment period in years.
    
    First, divide 'r' by 'n'. Then, add 1. 
    
    For example, if you've got a fixed rate of 8% per annum (0.08 as a decimal) that gets calculated annually, this amount would be 1.08.

Multiply 'n' by 't'. 
    
    In this example, if you're investing over five years, the value would be 1 x 5, or 5.

Then, multiply 1.08 by the power of 5. To calculate the power of 5, you'll need to multiply 1.08 five times.
    
    This would be 1.08 x 1.08 x 1.08 x 1.08 x 1.08.

Then, multiply that amount by 'P'.

You'll then see your total wealth ('A').
    
    If you've invested $10,000 as your initial investment ('P'), your wealth could reach a total of $14,693.28 after five years. 
    
    This is assuming you don't make any additional contributions over that time. Note that the compound interest formula doesn't include regular deposits into your investments.

Question 7

What is the formula to calculate compound interest per year?

Accepted Answer

If compound interest accrues on your investment annually, you would use the same compound interest formula.

The value for 'n' would be 1, because compound interest is only calculated once per year.

Question 8

How do you calculate a compound interest on a monthly basis?

Accepted Answer

Many bank accounts calculate compound interest each month. Compared to annual compounding, monthly compound interest grows at a faster rate because it occurs more often.

Once again, you would use the same compound interest formula.
    
    However, the value for 'n' would be 12, because compound interest gets calculated 12 times per year.

Question 9

How do I calculate the compound interest on a daily basis?

Accepted Answer

Interest that compounds every day tends to grow quickly -- simply because it's compounding very frequently. Many savings accounts compound daily but are paid out monthly, potentially resulting in higher accumulated earnings each month.

If you want to see how much interest you're earning every day, you need to use the same compound interest formula and plug in 365 as the value for 'n'.

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