Understanding and calculating simple and compound interest is one of the most important skills to develop for financial literacy. It helps you see how an investment or a debt will grow over time, and once you see just how fast that rate of growth can be, you will discover why the compound daily interest formula is so valuable.
There are two kinds of interest: simple and compounding. Something that grows with simple interest adds the interest based on the principal alone with each time period. For example, a loan for $100 that has simple interest calculated every year will grow by 1 percent of $100, or $1, every year. A simple interest calculator will let you plug in any numbers for the principal, the rate, and the time period to understand how fast something will grow. This turns out to be significantly slower than compound interest.
Compound interest is a bit more complicated. With compound interest, the interest is added to the principal and will be included with the principal for the interest calculation of the next time period. Using the same $100 loan, with annual compound interest instead, in the first year the interest is the same – $1. In the second year, the 1 percent interest is taken based on the new total of $101, for a final total of $102.01. The next year, the 1 percent interest is taken based on that $102.01 for a new total of 103.03. In this example, the numbers are small, but if the interest rate was 5 percent, 10 percent, or even 30 percent, or if the investment was over a longer period of time, the compound interest loan would grow much, much larger than the simple interest loan.
As you can see, calculating compound interest by hand can be tough, and it is easy to make mistakes. Using a daily compound interest calculator excel can automate a lot of the process and remove the possibility of miscalculating. When it comes to compound interest, a small math mistake can add up to a lot of money. This is especially true when you consider that there is continuous compound interest, which is very hard to calculate without a computer and a continuous compound interest calculator. Other special cases include a reverse compound interest calculator and a daily compound trading calculator.
While simple interest is more straightforward, most financial transactions actually involve compound interest. Credit card debt, student loans, mortgages, car loans, and most other loans are all calculated using compound interest. On top of that, when you save money by investing it in the stock market or other financial instruments, the investment returns are also usually calculated using compound interest. If you want to know how to track your debts and investments, there is no getting away from compound interest calculation.
Whenever you are dealing with something that involves interest, make sure that you know whether it is simple or compound, what the rate of interest is, the time period, and the principal. With those facts, you can then use a simple interest calculator or a compound interest calculator to map out how it will grow. This is essential information for budget planning and any other predictions you need to make about your finances. Just let the calculator do the hard work and crunch the numbers for you, and you will find it easy to plan out everything years into the future.