Hey everyone, I wanted to share a quick guide on calculating compound interest using Excel. I know a lot of us deal with finances, so understanding how to do this can be really helpful. Let’s jump right into it!
Method 1: Using the FV Function (Most Effective)
This method is the quickest and most direct way to calculate future value based on a constant interest rate.
- In any cell, enter the following formula:
=FV(rate, nper, pmt, [pv], [type]).
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Here’s what each argument means:
rate: The interest rate per period. For example, if you have an annual interest of 5%, and you are calculating the future value after 12 months, you would use the rate of 5%/12 (annual interest/number of compounding periods per year).nper: The total number of payment periods.pmt: The payment made each period (this should be 0 if you’re just calculating compound interest on a principal amount).[pv]: (Optional) The present value or the initial investment.[type]: (Optional) When payments are made – 0 for end of period, 1 for beginning of period. Typically, you would leave this blank.
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Let’s say you invested $10,000 at an annual interest rate of 5% for 10 years, compounded yearly. You would enter the following in a cell:
=FV(0.05, 10, 0, -10000)where 0.05 is the rate, 10 is the number of years, 0 is the periodic payment and -10000 is the negative present value as we are considering a cash outflow.
- The result will display the total future value of your investment after 10 years, including all the accumulated interest.
Method 2: Step-by-Step Calculation (Less Effective)
Although the FV function is generally preferred, you can also build the calculation step by step. This method helps you visualize how the compound interest accrues each year.
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Set up a table with columns for Year, Starting Balance, Interest Earned, and Ending Balance.
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In the first row, enter year 0 (current), the initial investment in the “Starting Balance” column, and leave the “Interest Earned” and “Ending Balance” columns blank for now.
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In the second row, under the “Year” column, write 1. In the “Starting Balance” column, enter the initial investment value.
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In the “Interest Earned” column for year 1, enter the formula to calculate interest. For example, if your annual interest rate is in cell B1, and your starting balance is in the previous cell (e.g. C2), then the formula should be
=C2*B1 -
In the “Ending Balance” column for year 1, add the starting balance and interest earned:
=C2+D2.
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For the next year’s starting balance, in the cell under the first year’s “Starting Balance” value, enter the formula that refers to the previous year’s ending balance. For example, if the ending balance for year one is in cell E2, then the formula will be
=E2.
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Copy the formulas down for as many years as you want to calculate. This will show you how your investment grows year by year.
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The ending balance of the last year will be the same value as what you would calculate by using the FV function, but here you can see how the money has grown each year, demonstrating the power of compounding.
That’s pretty much it. These two methods give you options on how you can calculate compound interest in excel.