Compounding Interest Calculator
Why is compound interest the 8th wonder of the world
Compound interest is when interest on an investment is added to the principal amount invested. This means that the total value of the investment grows at a higher rate than the original amount.
How does compound interest work with stocks
Compound interest works with any investment, whether a stock, bond, mutual fund or another financial instrument. You will need to calculate the compounded interest rate by using the formula:
The most common example of compound interest is with bonds. For example, if you buy $1,000 worth of 10-year U.S. Treasury Bonds at 5% per year, then after one year, you would have $1,050. After two years, you would have $1,102.5. And after three years, you would have earned $1157.63. That is by $7.63 more than you would initially think.
Compound interest works similarly with stocks. For instance, let’s say you invest $100 into Apple stock every month, which historically had a CAGR of about 22%. After 12 months, you would have $1222. After 24 months, you would have earned a total of $2814. And after 36 months, you would have compounded $4631. In other words, if you had invested $100 each month into Apple stock, your total contribution was $3600, would have earned nearly $1031 after 36 months, about $78 of which is due to compounding interest.
When does compound interest take off
If you experimented with the tool above, you surely noticed the exponential growth. But when can we say that the compounded interest started to pay off?
A good answer would be when the total earnings exceed the total contributions. Assuming an average yield of 10%, that will happen after 14 years.
See the example below: