HOW EXACTLY TO Use Compound Interest Formula In Excel

Professor Albert Einstein once said, “Compounding interest is the most powerful power in the universe”. It really is doubtful that Einstein said that or not necessarily, but it doesn’t eliminate from the need for the message. Compounding is an extremely powerful force that either work against you (borrowing) or for you (investing).

Let’s get started with the fundamentals of Compound Interest. For determining the near future value of any investment earning at a constant interest the following formula can be used. Here we are going to calculate the near-future value of some endeavor using the method of compound interest in excel.

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100 investments for 5 years at an annual interest of 5%. For this, we have to calculate the future value using the method of compound interest. We can use the method directly to compute the near future value in excel. The below picture shows how it is done. 127.63 which is the accurate value because of this.

The future value of some amount of investment for a number of years can be shown using the same method. Here the investment will go as the years added. The following picture shows the formula of compound interest to calculate the future value of any investment with monthly contributions. The following picture shows, the way the substance interest is calculated quarterly when the eye is paid.

Just like the previous illustrations, we can determine the near future value of a short investment for daily contributions. The next picture shows how it is computed. As you can plainly see, while calculating the near future value for the daily compounding interest with the same investment, the total result is a little higher than with monthly compounding or yearly compounding.

This is because the 5% interest rate provides interest to the initial investment every day. For monthly or yearly compounding it adds for each month and year respectively. It `s a good practice to use the Excel` s FV function which calculates the future value based on different factors. Note: Here 0 is used as there is no periodic payment. We have to multiply today’s value (pv) with -1 as excel treats this as “money out” for your investment. Let’s assume we want to calculate the near-future value of same factors.

The only difference will be with the compounded period. Here, per season, which is 52 the compounded intervals will be the final number of weeks. The picture below shows how it is performed. Let’s determine the compound interest with more options where additional contributions (poet & type) are added. 500 is added. The next picture shows us the whole result and calculation.