How to use Bimbi Investing’s compound interest calculator:
- Enter in your initial deposit. The initial deposit could be an investment you bought or even money you have in a high-interest savings account.
- Then enter in your additional contributions, this is money you’ll be adding every month or, the money you can add annually. If you don’t think you’ll add any money you can leave it at $0
- Next, input the timeframe of your investment. As an example, if your time horizon is to stay invested for 20 years, then change the period to 20.
- This next step is where the magic happens. Enter in your rate of return; this is the interest rate you’ll receive on a high-interest savings account. Or, the rate of return you’ll receive from an investment.
- Once you’ve entered your rate of return, change the compound frequency. If you’re going to receive 8% each year, then change the frequency to annually.
The Bimbi Investing compound interest calculator will show you how your investments or, a high-interest savings account will grow and compound over time.
How compound interest works
Compound interest seems hard to understand at first, but it’s quite simple once you get it. Compound interest is the interest you earn on your original deposit, plus any interest you’ve already been paid on top of your initial deposit.
As an example, if you earn a 10% interest rate each year from a bank and you have $1000 deposited in the bank then after year one you’ll now have $1100. At the end of year 2 when they pay you your 10% again, they will pay this on the $1100, not your original $1000—giving you $1210, even though you only ever deposited $1000 into the bank.
Investments and compounding
Investing doesn’t offer you a set rate of interest; however, investing gives you rates of return. These returns are based on the change in the value of your investments. If your investment goes up or you receive a dividend, then that’s all part of your rate of return.
The returns from your investments or the stock market don’t go up in a straight line from year to year. Although, the historical data tells us over the long-term most stock markets globally have an average rate of return annually at around 7% to 11%, including dividends.
Those rates of return and compound interest can help you achieve your investment goals. Try out the compound interest calculator for yourself to see how your money can grow if you’re investing for decades!