Compound interest is one of the most important financial calculations that most of us often use, and it’s a must to learn to calculate it in Excel.
But before you do that you need to understand what actually compound interest is.
Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.Investopedia
In Excel, the method to calculate compound interest is simple.
Now, the thing is. You just need to use a calculation method and specify the time period for which you want to calculate.
So today, in this post, I’d like to show you how to calculate compound interest in Excel using different time periods. So let’s get started.
Yearly Compound Interest Formula
For calculating yearly compound interest, you just have to add the interest of the one year into next year’s principal amount to calculate the interest of the next year.
And, the formula in excel for yearly compound interest will be.
=Principal Amount*((1+Annual Interest Rate/1)^(Total Years of Investment*1)))
Let me show you an example.
In the above example, with $10000 of principal amount and 10% interest for 5 years, you will get $16105.
In the first year, you will get $10000*10% which is $1000, and in the second year, ($10000+$1000)*10% = $1100, and so on.
Quarterly Compound Interest Formula
Calculating quarterly compound interest is just like calculating yearly compound interest.
But, here you need to calculate interest four times a year. The interest amount for each quarter will add to the principal amount for the next quarter. To calculate the quarterly compound interest you can use the below-mentioned formula.
=Principal Amount*((1+Annual Interest Rate/4)^(Total Years of Investment*4)))
Here is an example.
In the above example, with $10000 of principal amount and 10% interest for 5 years, we will get $16386.
In the first quarter, we get 10000*(10%/4) which is $250, and in the second quarter, ($10000+$250)*(10%/4) = $256, and the same calculation method for 20 Quarters (5 years).
Monthly Compound Interest Formula
While calculating the monthly compound interest you need to use the basis you have used in other time periods.
You have to calculate the interest at the end of each month. And, in this method interest rate will divide by 12 for a monthly interest rate. To calculate the monthly compound interest in Excel, you can use the below formula.
=Principal Amount*((1+Annual Interest Rate/12)^(Total Years of Investment*12)))
In the above example, with $10000 of principal amount and 10% interest for 5 years, we will get $16453.
In the first month, we get 10000*(10%/12) which is $83.33 & in the second month, ($10000+$83.33)*(10%/12) = $84.02 and the same is for 60 months (5 years).
Daily Compound Interest Formula
While calculating daily compound interest again we have to use the same method with the below calculation formula. We have to divide the interest rate by 365 to get a daily interest rate.
So, you can use the below formula to calculate daily compound interest.
=Principal Amount*((1+Annual Interest Rate/365)^(Total Years of Investment*365)))
In the above example, with $10000 of principal amount and 10% interest for 5 years, we will get $16486.
On the first day, we get 10000*(10%/365) which is $4, and on the second day, ($10000+$4)*(10%/365) = $4, and the same is for every day for 5 years.
By using the above methods, I have created a cumulative interest calculator [Template] to calculate all of the above calculations for interest in a single worksheet.