Eventually, we are going to make a universal formula that calculates the future value with different compounding periods - daily, weekly, monthly, quarterly, or yearly. The Excel compound interest formulas explained further will help you get the savings strategy to work. Long time investments can be an effective strategy to increase your wealth, and even small deposits can make a big difference over time.
EXCEL ACCOUNTING WITH INTEREST TEMPLATES FREE HOW TO
How to calculate compound interest in Excel There are several ways to calculate compound interest in Excel, and we are going to discuss each one in detail. As you see, at the end of the second year, not only did you earn $0.70 on the initial $10 deposit, you also earned $0.05 on the $0.70 interest that accumulated in the first year. So, how much will your $10 deposit be worth after 2 years at the annual interest rate of 7% compounded yearly? The answer is $11.45 (10.7 + 10.7*0.07 = 11.45) and your earned interest is $1.45.
In our example, in addition to the principal amount of $10, the earned interest of $0.70 will also earn interest next year. In other words, you earn interest not only on the principal amount, but also on the interest earned in each compounding period. This increased amount becomes the principal for the next time period (compounding period) and also earns interest. The bank won't give the earned interest back to you, instead they add it to your principal investment. In case of compound interest, the principal in each time period is different. How much will your deposit be worth after one year at an annual interest rate of 7%? The answer is $10.70 (10 + 10*0.07 = 10.70), and your earned interest is $0.70. For example, you put $10 into a bank account. Perhaps, it might be easier to start with simple interest that is calculated only on the principal amount. More precisely, compound interest is earned on both the initial deposit (principal) and the interest accumulated from previous periods. In very simple terms, compound interest is the interest earned on interest.
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