This part of financial mathematics is present in your daily life even if you are not aware of it. By learning it and how to calculate compound interest you can avoid any nasty surprises.

Firstly, what is compound interest? You could have made a purchase or a large investment, or paid or received a compound interest. The majority of people, however, do not know how the bank calculated the amount to be charged and paid each month.

Calculators do exist that can do this for you, though at the time of making an important investment or a large purchase you may want to know exactly where your money will be going.

The study of interest is critically important to calculating your financial risks and obligations, to anticipate the future and analyze the loans you may have.

Most business and financial operations are carried out with compound interest with the motive of keeping in mind all the liquid interests, which overtime begin to also generate their own interest. This is known as capitalization of interests.

Calculating compound interest:

The following is a basic approximation of the financial method:

Step 1:

Let’s start with the first thing: compound interest is different to simple interest in that it is not paid off and discounted within each given period. Instead, compound interest accumulates on the capital to form a new capital amount, on which the interest rate is calculated.

Step 2:

Get together some details on the loan or investment which you want to calculate the compound interest of. You will need to know the initial capital which it starts with, the interest rate to be paid annually and the number of years over which you want to calculate the interest.

Step 3:

Use the formula: F=I (1+r)n where F is the final capital, I is the initial capital, r is the interest rate and n is the number of years.

Step 4:

Start with the the part inside the brackets and then using your initial capital with the final amount you can calculate the number of years needed to pay off the debt. Alternatively you can of course keep the number of years constant and vary another factor, all of this will help you learn how to calculate compound interest in no time!