Compound interest is computed as the interest paid on the principal and the interest that have been gained from the past. Let us say you have an initial investment, which has a fixed interest, and it earned in the first year. You decided to invest the earning that you have made thus increasing the amount of the principal, which in turn increases the amount of interest you will earn in the second year and in the succeeding years. The compound interest which is the interest you earn on the interest will be dependent on the number of years that you have allocated for the investment. Compound interest tables will help you to figure out how much income you will gain after a certain number of years on an annual basis. Below are tips on how to use compound interest tables.
- A compound interest table can be used to calculate the amount that you will gain from your initial investment over the years. This is very useful when you want to look at figures for long-term investments like mutual funds.
- A basic compound interest table is composed of four columns. The first column refers to the year/s of investment. The second column is for the value invested at the start of each year. The third column is the interest rate and the fourth column is the value of the investment at the end of each year.
- It is quite easy to use a compound interest table. If you have an initial investment of for example, one hundred dollars with an interest rate of ten percent per annum. At the end of the year your one hundred dollar investment will have earned ten dollars.
- Add the interest you have earned to your principal. So for the second year, your investment will now be one hundred and ten dollars. With the interest rate fixed at ten percent, your investment will earn eleven dollars – ten dollars for the initial investment of one hundred dollars and one dollar interest for the ten dollars you have earned as interest in the first year and reinvest.
- By the end of the seventh year, your initial investment of one hundred dollars will have doubled, earning you one hundred percent in compound interest. For investors, this is what is called the rule of seventy-two, meaning that for an investment with a fixed annual return, it will double within seven point two years.
- A compound interest table is used to view the future value of a single amount. Another compound interest table can be used to view how much the future value of a single sum is worth today with a set discount per period. Period can mean monthly, quarterly, semi annually or annually. If you are computing loan payments of equal amounts to be paid at regular intervals compounded using the same interest rate you should look at an ordinary annuity of $(amount) future value table. For a deeper understanding how compound interest tables work, check the samples here.
A compound interest table is very useful when computing interest on loans and mortgages, as this will help you to plan your future finances better. When you have created a compound interest table, you will see at a glance the effects of compounding. If there are changes in the interest rates or the number of periods (length of time or duration of an investment or loan) you will see changes in the multiples. Compound interest tables are best used as a general gauge on how much an investment or a loan will be worth in the future when compound interest is computed. More accurate computations should be secure from the financial institution or agency you are dealing with.