Video:How to Calculate Compound Interest

Transcript:How to Calculate Compound Interest

Compound interest results in interest being calculated not only on the original principal, but also interest on the accumulated interest. As a real estate agent working with real estate investing clients, if compound interest is a factor, it's important that you know how to calculate compound interest.

Method for Calculating Compound Interest

Here's how:

Using a simple time charting method: Let's look at a $100,000 principal amount with a 6% interest rate, compounded annually for three years.

Year 1: $100,000 X .06 for one year is $6000 interest.

Year 2: Now we have $106,000 X .06 for the second year is $6360 interest.

Year 3: Starting with $112,360 accumulated X .06 = $6742 interest.

At the end of year 3 we have $119,102. As you can see, compound interest definitely beats simple interest for return.

Calculating Compound Interest Using a Mathematical Formula:

This is a straight formula, but a bit trickier as we need to raise a number by a power.

Principal X (1 + Periodic Rate) ^ Number of Periods = Future Amount

$100,000 X (1 + .06) ^ 3 = Future Amount

$100,000 X (1.06 x 1.06 x 1.06) = Future Amount

$100,000 X 1.19 = $119,100 rounded off.

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