P = C (1+ R / N)n*tWhere:
Compound interest is commonly used with investors and for anyone with a savings account. Compound Interest can calculate how much money you have invested over a given time with the initial investment and interest added on. You can even solve for different variables as long as you leave one box empty!
Example 1:
Mr. Firthum has invested $73,000 in a software engineering firm. He predicts he will earn 20% on his principal investment every year. How many years will it take for his investment to be worth $1,000,000?
P = $1,000,000
C = $73,000
R = 20%
n = 1
t = x (we are solving for x)
P = C (1+ R / n) ^nt
1,000,000 = $73,000 (1 + 10% / 1) ^1*t
t = 14.36 years
Example 2:
It seems that you could use compound interest with loans right? Well let's see what example two proves!
The Smith's would like to take out a loan for a new house. The house is priced at $200,000. They can afford a down payment of $50,000. That means they need to take out a mortgage for $150,000 on their new house. The mortgage they take is at 10% for a 30 year term. What is the total amount they would pay back over the 30 year period?
P = x (we are solving for x)
C = $150,000
R = 10%
n = 1
t = 30 years
Solve:
P = C (1+ R / n) ^nt
x = $150,000 (1 + 10% / 1) ^1*30
x = $2,617,410.34
If the Smith's are going to pay back over $2.5 million just for borrowing $150,000 then their lender is going to be very well off! Compound interest doesn't work in the form of loans for the reason that the principal is lessened every time you make a payment. So for this reason, you must use a mortgage calculator! But this is still a very useful calculator for savings and investment purposes!
*Compound interest is paid on the initial principal, and on the past accumulated interest.
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