Key Takeaways:

• Versatile Formula Application: Excel's fundamental compound interest formula, =Principal (1 + Rate/CompoundsPerYear)^(CompoundsPerYear Years), enables you to project future balances based on any starting amount, interest rate, compounding frequency, and duration.
• Accounting for Regular Deposits: Utilizing Excel's FV function, you can compute compound interest with regular deposits, providing a more accurate depiction of savings growth with periodic contributions.
• Creating Custom Tables: Excel simplifies the creation of a compound interest table to monitor balances over time. By applying a formula across rows, you can observe annual growth and modify different scenarios to see the effects of various compounding frequencies and rates.

Table of Contents

Method 1 – Compound Interest Formula

Imagine you plan to invest $10,000 in a savings account for 3 years. The account offers a 6.5% return with semi-annual compounding. You want to determine the future value of your investment using the compound interest calculator in Excel.

The formula for this method is:

*P’ = P(1+R/N)^NT**

where:

• P’ represents the future value of the investment, including interest.
• P is the initial principal amount.
• R is the annual interest rate (expressed as a decimal).
• N is the frequency of compounding per unit t.
• T is the investment duration in years.

Follow these steps to utilize the compound interest calculator in Excel:

STEP 1: Input the initial principal amount, P. Here, it is 10000.

=10000

STEP 2: Add the multiplication sign(*).

=10000*

STEP 3: Enter 1 + 0.065/2 within parentheses.

=10000*(1+0.065/2)

where:

• 0.065 is the annual interest rate in decimal form, i.e., R.
• 2 is the number of times interest is compounded, i.e., N.

STEP 4: Insert the ^ sign.

=10000*(1+0.065/2)^

STEP 5: Now, enter *23 within parentheses.**

=10000*(1+0.065/2)^(2*3)

where:

• 2 is the number of times interest is compounded, i.e., N.
• 3 is the duration of the investment in years, i.e., T.

The resulting amount will be the future value of the investment, compounded semi-annually.

Method 2 – FV Formula

The FV function in Microsoft Excel aids in calculating the future value of investments, assuming periodic, regular payments with a constant interest rate. Let's utilize Microsoft Excel's FV Function to create a compound interest calculator in Excel.

The syntax for the FV function is:

=FV(rate,nper,pmt,[pv],[type])

• Rate: The interest rate per period.
• Nper: The total number of payment periods in an annuity.
• Pmt: The payment made each period. It cannot change over the life of the annuity. Typically, pmt includes principal and interest but no other fees or taxes. If pmt is omitted, you must include the pv argument.
• Pv: The present value, or the lump-sum amount that a series of future payments is worth right now. If pv is omitted, it is assumed to be 0 (zero), and you must include the pmt argument. Type: This is an optional argument.
• Type: The number 0 or 1 indicates when payments are due. 0 if the amount is being added to the investment at the end of the period or 1 if the amount is being added to the investment at the beginning of the period. This is an optional argument.

Follow these steps to use the FV function to calculate compound interest:

STEP 1: Input the FV function.

=FV

STEP 2: Enter the first argument, i.e., rate. Here, it is 0.065/2, i.e.,

=FV(0.065/2

STEP 3: Enter the second argument, i.e., nper. Here, it is 3*2, i.e., 6.

*=FV(0.065/2,32**

STEP 4: Enter the third argument, i.e., pmt. Here, it is 0 as there were no deposits made during the period.

*=FV(0.065/2,32,0**

STEP 5: Enter the fourth argument, i.e., pv. Here, it is -10,000.

*=FV(0.065/2,32,0,-10000)**

You must use a negative sign as it represents a cash outflow.

The resulting amount is the future value of your investment.

Additional FV Formula Example:

Suppose you've just turned 18 years old (CONGRATULATIONS!) and discovered that your parents deposited an amount with their bank when you were born.

Now that you're 18, you can collect this money and spend it all in one day!

How much would be available for you to spend?

Fortunately, there's an easy way to calculate this using Excel's FV formula! FV stands for Future Value.

The future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth over time.

In our example below, we have the table of values needed to calculate the compound interest or Future Value:

(Change the NUMBER OF YEARS column to 18 to see the results on your 18th birthday)

Here's how you can do this:

Download excel workbookCOMPOUND-AVERAGE-FORMULA.xlsx

STEP 1: We need to enter the FV function in a blank cell:

=FV(

STEP 2: The FV arguments:

rate

What is the interest rate?

Select the cell containing the interest rate (ensure it's in a percentage):

=FV(B9,

nper

How many periods?

Select the cell containing the number of years:

=FV(B9, C9,

pmt

What is the periodic payment?

We have no periodic payment, only an initial amount, so let's input 0:

=FV(B9, C9, 0,

pv

What is the initial amount?

PV stands for present value, the initial amount. We need to change this to a negative value by multiplying by -1.

The reason for using a negative value is that Excel treats this as "money out" for your investment.

=FV(B9, C9, 0, A9 * -1)

Apply the same formula to the rest of the cells by dragging the lower right corner downwards.

You now have all of the compound interest results! GO OUT & SPEND!

Frequently Asked Questions:

How do I calculate compound interest in Excel?

You can calculate compound interest using the formula:
=Principal (1 + Rate/CompoundsPerYear)^(CompoundsPerYear Years)
Substitute Principal with your initial investment, Rate with the annual interest rate (as a decimal), CompoundsPerYear with the number of times interest is compounded per year, and Years with the total duration in years.

Can I calculate compound interest with periodic contributions in Excel?

Yes, you can use the Future Value (FV) function to include regular contributions:
=FV(Rate/CompoundsPerYear, CompoundsPerYear * Years, -Contribution, -Principal, 1)
Here, Contribution is your regular deposit, and Principal is the initial amount. Setting the last parameter to 1 calculates the future value with contributions at the beginning of each period.

How can I build a compound interest table for each year?

To create a yearly breakdown, enter your initial balance in the first cell, then use a formula in subsequent cells that compounds the interest based on the previous year’s balance. For example, in cell B2, use =B1*(1 + Rate/CompoundsPerYear) and copy it down for each year to see the balance grow annually.

Conclusion

In conclusion, understanding and utilizing a compound interest calculator is essential for maximizing returns on investments over time. By employing either the Compound Interest Formula or the FV Formula in Excel, investors can more accurately project the future value of their investments.

These tools enable individuals to make informed financial decisions and leverage the power of compound interest for long-term financial growth.

Click here to learn more about Finance Formulas in Excel.

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