How To Calculate Compound Interest

Last Updated on August 16, 2023 by Jake Sheridan

In this tutorial, you will learn how to calculate compound interest in Google Sheets.

How To Calculate Compound Interest in Google Sheets

Compound interest is a powerful financial concept that you should be aware of if you wish to maximize the growth of your investments. Compound interest refers to the interest that is earned on the interest that has already been earned.

For example, if you have an investment of $1000 and an interest rate of 5%, this would give you an annual return of $50. However, if your investment compounds daily, you will actually receive a return of $51.27. Over time, the compounding effects will result in a larger amount of interest gained each compounding period.

Compound interest is not just applicable to investments. Credit cards and most bank loans also operate on compound interest as well. For example, a particular bank may charge you an interest rate of 10% compounded monthly.

In this guide, we will show you how to calculate compound interest in a Google Sheets spreadsheet. We will explain how the FV function can be used to determine the future value of a particular investment or loan after a specified number of compounding periods.

How To Find the Compound Interest of an Investment in Google Sheets

Here’s how to find the compound interest of an investment in Google Sheets.

Step 1

First, we’ll need to specify the principal amount. The principal should be the initial amount deposited into the investment. For loans, the principal refers to the money you’ve initially agreed to pay back.

In this example, we will compute for the value of a $1000 investment after a year in a savings account that has annual interest rate of 5% compounded daily.

Step 2

Next, we must indicate the annual interest rate of our investment. The annual interest rate refers to the percentage of the principal amount we will earn after a year.

Since our investment uses daily compound interest, we will need to divide the annual interest rate by 365 to reflect the actual rate per compound period.

Step 3

Next, we must determine the number of compounding periods. When handling daily compounding investments, we’ll use the number 365. Monthly compounding will use 12 periods in a single year.

Do note that some banks use 360 compounding periods when calculating interest.

Step 4

Next, we’ll determine the number of years our investment will earn interest.

Step 5

We’ll use the FV function to compute the future value of our investment.

The FV function requires the following arguments: the interest rate, the number of periods, the payment amount and the present value.

As mentioned previously, we must divide our annual rate by the number of compounding periods in a year. The present value is also written as a negative number to indicate that we are depositing an amount that we intend to receive in the future.

Since we are not making any payments each compounding period, we will set the payment amount to zero.

Step 6

Once we know the value of our investment after a year, we can subtract the principal amount to determine the total interest earned during that time.

Step 7

If you would like to have an idea how your investment can grow after several years, you can create a table that tracks the value of your investment over a multi-year period.

We can find the investment value for multiple years by simply multiplying the number of compounding periods per year by the total number of years.

Step 8

The FV function can also work for other types of compound interest. For example, you can change the number of compounding periods to 12 to calculate monthly compound interest.

Summary

This guide should be everything you need to calculate the compound interest in Google Sheets.

You may make a copy of this example spreadsheet to test it out on your own.