Compound Interest Calculator: Benefits and Free Excel download
Understanding how money works and positioning it to work for you is critical to wealth creation.
This might sound obvious but it is a fact that not enough people are making this real in their lives.
We live at a time when many are struggling to save, pay off debts and meet their regular monthly expenses.
At the same time, there is a need for people to invest in order to meet their future needs or goals.
Although there is much to understand when it comes to investing money, a good place to start is to focus on foundational principles
Compound interest is the single most important principle you need to understand, especially if you have time on your side.
You most likely would have come across compound interest at school.
For most, it remains an abstract idea when it comes to wealth creation because:
- Many do not have any financial goals.
- And where they have goals, they have not converted those goals into numbers.
- Where they have goals in numbers, many have not come up with an investing plan to achieve their goals.
It’s easy to worry about the small details in our lives, and completely miss the trick, which is that time is the real asset that we need to understand and use properly.
In the age of instant results, it has never been more important to fully understand the importance of compound interest and how it can work for you.
To appreciate this though, it helps to go back to basics.
What is Compound Interest?
It is simply the mechanism by which money grows over time.
For example, you invest £1000, for a hypothetical return of 10% i.e. £100 by the end of year 1.
If you reinvest that amount such that the original £1,000 and the £100 both generate interest, you’d have £1,210 at the end of year 2. I.e. additional 10% x (£1,000 + 100), etc
You get the gist.
Here’s the thing though, what does this information really mean for you personally?
How could it potentially change your life if you have a clearly defined plan?
In comes the Compound Interest Calculator.
As >70% of the population learn through a visual learning style, it helps to actually see this in action.
Before that though, let’s dig a bit deeper into the benefits of compound interest.
Why Compound Interest is Useful
Below are some important reasons why compound interest is extremely useful:
The chances are, if you have any goals at all, they likely have something to do with money.
Such goals could include saving for a home, becoming mortgage free, investing for your children’s education, financial independence or early retirement.
Compound interest is there to help you achieve those goals quicker than you would if you tried through savings only.
The key though is to position your money in a compounding environment, and where possible, automate your investing.
In addition to positioning in the right environment, investing early and consistently (e.g. monthly) is key.
Everyone dreams of early retirement or at least having the option of it.
The hard part about planning for retirement is setting in motion a plan as early as possible, making some reasonable assumptions about what retirement income you might need.
Although there are a variety of asset classes that you can explore to prepare for retirement, investing through the stock market is one important one.
Investing in equities and bonds and reinvesting dividends and coupons over many years is the natural way to see the power of compounding at work.
The compound interest calculator I share below will help you visualise this growth over time.
Like planning for retirement, achieving Financial Independence requires a personalised plan that works for you.
Investing is just one lever on the path to financial independence.
You need time and consistency.
It is enough of a crime to overlook the power of compound interest in your own lifetime.
It’s a much graver condition if you don’t pass on this idea onto your children in a practical way.
If you’re interested in changing the game generationally for your family, then start today with your children.
They have the advantage of time on their side.
I’d highly encourage money conversations at home with your kids. Talk about your regrets and your wins.
Never underestimate their ability to grasp an idea and put it to work.
Related reading: How to Teach Your Kids The Magic of Compound Interest
Rule of 72
This is an important rule borne out of the mechanism of the compound interest calculator.
It helps to make compound interest real in your life by telling you 2 important things:
1. How Long It Takes To Double Your Money
Imagine you are 35 years old and you have £100k invested in the stock market.
How long would it take you to double that money to £200k?
The rule of 72 essentially gives you an answer based on the assumptions you make.
It works like this:
72 divided by an assumed rate of return = Number of years needed to double your money.
For example, if you only generate a 1% return in your savings account, then:
It will take 72/1 = 72 years to double your money to £200k.
Or for example, if you generate a 7% return on investment through the stock market, then:
It will take 72/7 = ~10 years to double your money to £200k.
2. What Rate of Return You Need To Double Your Money
Imagine you are a 45-year-old with £100k invested and you have a 20-year investment horizon.
The rule of 72 will help you figure out what rate of return you need to double your money to £200k in 20 years.
Simply, it would be 72/20 = 3.6%.
In addition the Rule of 72, a compound interest calculator helps you carry out various scenario analysis based on your needs.
How a Compound Interest Calculator Works
The beauty of a compound interest calculator is that you only need a handful of inputs to get a glimpse of your future.
Here are the key inputs:
This is not integral to the spreadsheet but is only there to suit your aesthetic needs.
I have gone with 3 main currencies – £, $ and €.
There is also an option of currency X if you don’t want any of the above currencies.
To personalise this compound interest calculator further, I’ve added a cell for your current age.
This helps to make the graphs a lot more relevant as the result will match your time horizon.
This refers to how long you think you’d need to invest your money in order to achieve your goals.
It is the first true input into the compound interest calculator and one of the most sensitive.
There are 3 of them that are necessary to work out your numbers.
The other two are the amounts you invest monthly and your assumed rate of interest.
Monthly Investment Amount
This really shows you the power of consistent investing each month.
When you play around with the spreadsheet later vary the monthly investment amounts and see how they impact the numbers.
Your monthly amount here will depend on what your goals are for the future rather what you can save today.
To understand this better, I highly recommend reading this case study:
This is the assumed return on your money usually driven (in reality) by your asset allocation.
Again, this is a highly sensitive input and one that you should keep very realistic.
If you have a long horizon (>20 years), it is reasonable to assume a 5 or 6% return here if you allocate 80%+ to high-risk assets such as equities.
FREE Compound Interest Calculator
I have put some work into creating a compound interest calculator that you can actually own.
I’ve even added scenario analysis and graphs to make visualising your future money growth more appealing.
This calculator has both monthly and annual compound interest figures and it is also multi-currency.
Simply change the inputs to suit your needs and off you go!
No email opt-in required too! Just click below and download.
Below is a preview of what it looks like:
Scenario analysis & graphs:
Making compound interest personal is key to making it work for you.
The compound interest calculator is here to accompany you on the journey of thinking of your goals in numbers and making better decisions.
Keep things realistic and consider various scenarios at all times.
Before you know it, you’ll even begin to think of your personal development and ideas through the lens of compounding gains.
Compound interest calculator: Further reading
- 7 Best Income Generating Assets For Passive Income
- 9 Smart Ways To Invest £1,000
- The Maths Behind Compound Interest
- 10 Tips For Smarter Investing
When you ordinarily think of “Compound Interest”, what comes to mind? Do please share some thoughts on how useful you’ve found the compound interest calculator.
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.[yasr_overall_rating size=”small”]