Compound Interest Calculator

What is a Compound Interest Calculator?

As a long-term investor, the concept of ‘compounding’ can be your best friend. Through the magic of compound interest, relatively small sums made periodically can accumulate into something truly meaningful over a period of years. To demonstrate an example of the power of compounding, consider this: a $100 deposit made every month from the time that a person is 25 years old which grows at a rate of 8% each year can turn into close to $240,000 to the time he/she retires at 65. The best part is that the higher your monthly deposit, the faster your money grows. By investing $200 per month instead of $100, the same investor makes nearly $480,000 by the time he/she reaches 65.

From an investment standpoint, this is clearly highly attractive. The underlying theory behind compounding is that as your money grows, future growth is added upon the interest that you have already earned. For example, consider a $100 investment that grows at 10% each year.

• In Year 1, the $100 investment will turn into $110 (i.e., $10 growth)
• In Year 2, the $110 value of your portfolio will turn into $121 (i.e., $11 growth)
• In Year 3, the $121 value of your portfolio will turn into $133 (i.e., $12 growth)

This continues on and on. What you are seeing is compounding at work. Each year that your portfolio grows by the amount of interest earned, that incremental interest is also being put to work in the markets, helping your money grow faster. For investors of all ages looking to understand how they can get their money to work for them, the Hardbacon Compound Interest Calculator is a highly versatile tool. Some of its uses are to:

• Determine the total value of your portfolio at the end of a certain number of years based on your deposit amount and return assumptions
• Test the changes in portfolio value that are brought about by changes in your deposit amount or returns
• Understand what type of deposit you need to make each month to hit your investment objectives
• Understand what type of return you need to make to hit your investment objectives

 

How to use the Hardbacon Compound Interest Calculator

The Hardbacon Compound Interest Calculator is designed to provide you with a streamlined view of your investing future based on the assumptions that you realistically believe you can achieve. As a concept, compounding works best over longer periods of time. That said, it is never too late to start.

To use the calculator, you need to enter the following:

Initial Investment: The initial amount that you are starting your investment journey with. While you may have some cash already that you are ready to invest, it’s totally fine if the number you put here is zero. Remember: every investor has to start from somewhere.

Amount of regular deposits: This is the most important piece. Enter the total value of deposits into your investment account that you can reasonably make on a weekly, bi-weekly or monthly basis (based on your own preferences, income, and expenses).

Frequency of deposits: Here, you can choose between the options of ‘weekly’, ‘biweekly’ or ‘monthly’. The more frequently you can contribute, the more time that your investment has to grow! However, if your brokerage charges fees for each deposit you make, you may also want to consider that. For reference, most investors choose to deposit on a monthly basis.

Projected interest rate: This is the rate of return that you expect to earn on the markets per year on average over the specified number of years.

Compounding frequency: This is the number of times that you expect to earn an incremental amount on your investment that can be reinvested back into the markets. For example, if your investment is in a stock that pays quarterly dividends, then your compounding frequency would be ‘quarterly’.

Duration of the investment: This is the total number of years that you are making deposits into the market.

 

Understanding the results of the Compound Interest Calculator

Once you have input all of the required entries on the left of the screen, turn your attention to the right to see what type of growth you can expect to see over the life of the investment given the assumptions you have entered. You should see a few items here, namely:

Amount of regular deposits: This represents the total value of the deposits that you made over the years. For example, if you made monthly deposits of $100 over 10 years, you should see $12,000 as your total amount of deposits (i.e., $100 x 12 months per year x 10 years).

Total deposits: This number takes the ‘Amount of regular deposits’ and adds the ‘Initial Investment’ to give you an idea of the total amount of money you invested into the market over the period of time that you have entered.

Interest earned: This figure represents the amount of growth that you should see on your portfolio over and above what you invested. For example, if your ‘Interest earned’ number is $200,000, that means that you have made $200,000 in profit over the period of time.

Value at the end of the period: The ‘Value at the end of the period’ number is simply the total size of your portfolio at the end of the number of years you have entered. This number represents all the deposits you have made over the years and the growth that those deposits have experienced.

Note: The ‘Interest earned’ and the ‘Total deposits’ should cumulatively add up to the ‘Value at the end of the period’. Conceptually, this makes sense. The total value of your portfolio should reflect the amount of money that you put in and the investment profit that that money generated over the period of time.

 

Learn more about the Compound Interest Calculator Inputs

At this point, the magic of compounding should have become clearer to you as an investor. Some of the greatest investors in history such as Warren Buffett have talked at length about the power of compounding on an investment portfolio. However, it is also important to note that the outputs you see are directly dependent on the quality of your inputs. High-quality inputs help to enhance the accuracy of the results you generate. Below, you will find a more thorough explanation of the inputs, as well as details on how you can get the required information you need to make informed decisions.

Initial investment: The initial investment varies from person to person. This may be the savings you have built up, an inheritance or gift you received from a loved one, or other such sum of money that you are now looking to put into the markets to earn growth.

Amount of regular deposits: This is another variable that can change from person to person. The best way to go about finding the best number for yourself would be to create a personal budget comprised of all your income and expenses. Once you know the residual amount that you have left over each month after accounting for all your expenditures, you can determine how much you want to use as a deposit.

• Always make sure that your bank account has a minimum amount of savings just in case of an emergency. Use our Emergency Fund Calculator to determine how much you should have saved up and easily available to access should you ever need it.
• Discipline is key! Once you land on a suitable deposit number that you can make on a weekly, biweekly or monthly basis, it is important to stay as faithful to that deposit schedule as possible to give yourself the best chance to reach your financial goals.
• Frequency of deposits: You may choose to deposit into your investment account differently based on your own personal preferences. Some of the factors that should be considered when making this decision include how often you get paid, how predictable your expenses are each month, and when you typically expect to require money for important bill payments.

Some people choose to set up an automatic withdrawal from their account every time their biweekly paycheck hits. Others choose to make a monthly deposit at the end of each month.

Projected interest rate: Your projected rate of growth depends on what type of assets you are planning to purchase and your expectations of each. Typically, stocks have returned 7-10% on average each year. However, if part of your portfolio is comprised of bonds, these return slightly lower growth of 4-6%. You may want to ask a financial advisor for assistance in this matter if you are unsure.

• It is very common for people to be invested in both stocks and bonds. If this sounds like you, then you can use a weighted average to calculate the return. For example, if 75% of your portfolio is in stocks and the remaining 25% is in bonds and the expected returns for stocks and bonds are 8% and 5%, respectively, your ‘Projected interest rate’ might be: [(75% x 8%) + (25% x 5%)] = 7.25%.

Compounding frequency: In most cases, you would be best off by selecting ‘annually’. However, if your money is invested into a certain bond that makes regular interest payments or a stock that pays regular dividends, the compounding frequency would then differ accordingly.

Duration of the investment: The duration of the investment is again contingent on your own situation. If you are saving for a child’s education, you might want to enter the number of years until they leave for university. If you are saving for retirement, then you can enter the number of years until you turn 65.