Compounding interest is one of the most powerful methods that investments use to increase their relative value. Albert Einstein said that compounding interest was the most powerful force in the universe and I totally agree with him.
Formula for Compounding Interest = M = P(1+i)^n
M = Final Amount
P = Principal Amount
i = Rate of Interest
n = Number of Years Invested
Just click the above link to bring up the compounding interest calculator.
1) Enter current principal amount
2) Enter future contributions amount
3) Enter time criteria
4) Enter growth rate
5) Click calculate
This tool is quite useful in determining the approximate future account value of 401K and savings accounts.
This calculator is interesting because it shows projected growth in a time-accelerated fashion. It is pretty interesting to plug in a few figures and watch that dollar amount sky rocket!
If you feel like making your own compounding interest calculator in excel, I’ve found the following format to work quite well. The figures in this example are for the performance of one year’s contributions of an individual contributing 12% of their salary to their 401K over a range of 10-40 years and at rates of return varying from 4-15%.
As you can see, compounding interest can allow one year’s contributions to a 401K to compound to over half a million dollars at a 12% rate of return. When taking a historical view that accounts for capital gains and dividends, this figure isn’t out of the question.
Feel free to send me an e-mail at email@example.com if you would like a free copy of my compounding interest calculator in Excel.