- 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.
$100,000 X .06 for one year is $6000 interest.
Now we have $106,000 X .06 for the second year is $6360 interest.
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.
- As 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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What You Need
- Just a pencil or an interest calculator.