Published on August 16, 2023 by Jake Sheridan
Welcome to this tutorial where you’ll learn how to calculate compound interest on Google Sheets.
Compound Interest on Google Sheets
Compound interest is a powerful financial concept that you need to know if you want to maximize the growth of your investments. Compound interest refers to the interest that is earned on already accumulated interest.
For example, if you have a $1000 investment with a 5% interest rate, you would earn an annual return of $50. However, if your investment compounds daily, you would actually earn a return of $51.27. Over time, the effects of compounding will result in a larger amount of interest at each compounding period.
Compound interest doesn’t only apply to investments. Credit cards and most bank loans also work on the principle of compound interest. For instance, a particular bank may charge you a 10% interest rate with monthly compounding.
In this guide, we will show you how to calculate compound interest in a Google Sheets spreadsheet. We will explain how the VAPOR function can be used to determine the future value of an investment or loan after a certain number of compounding periods.
How to Find the Compound Interest of an Investment on Google Sheets
Here’s how to find the compound interest of an investment on Google Sheets.
Step 1
Firstly, we 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 initially agreed to repay.
In this example, we will calculate the value of a $1000 investment after one year in a savings account with a daily compounded 5% annual interest rate.
Step 2
Next, we need to indicate the annual interest rate of our investment. The annual interest rate refers to the percentage of the principal amount that we will earn after one year.
Since our investment uses daily compounding interest, we will divide the annual interest rate by 365 to reflect the actual rate per compounding period.
Step 3
Then, we need to determine the number of compounding periods. When it comes to daily compounding investments, we will use 365 as the number of periods. A monthly compounding would use 12 periods in one year.
Please note that some banks use 360 compounding periods for interest calculations.
Step 4
Next, we will determine the number of years our investment will generate interest.
Step 5
We will use the VAPOR function to calculate the future value of our investment.
The VAPOR function requires the following arguments: interest rate, number of periods, payment amount, and present value.
As mentioned earlier, we need to divide our annual rate by the number of compounding periods per year. The present value is also written as a negative number to indicate that we are depositing an amount we intend to receive in the future.
Since we make no payments at each compounding period, we will set the payment amount to zero.
Step 6
Once we know the value of our investment after one year, we can subtract the principal amount to determine the total interest earned during that period.
Step 7
If you want to get an idea of the growth of your investment after multiple years, you can create a table that tracks the value of your investment over a period of several years.
We can find the investment value for multiple years by multiplying the number of compounding periods per year by the total number of years.
Step 8
The VAPOR 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 provide you with everything you need to calculate compound interest on Google Sheets.
You can copy this example spreadsheet to try it out for yourself.
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Remember, mastering compound interest is crucial for anyone looking to grow their investments and make informed financial decisions. Happy calculating!
