Compound interest generates your money to develop quickly. It makes a sum of money increase at a more rapid rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding time. This means that you don’t have to put away as much money to reach your goals! That’s why it is much more important than you think. In this tutorial, you will learn to create a daily compound interest calculator in Excel.
This tutorial will be on point with a suitable example and proper illustrations. So, stay tuned to enrich your Excel knowledge.
What is Compound Interest in Excel?
Compound interest means earning or paying interest on interest. Basically, it is one of those popular financial terms. When we think about compound interest, we consider it as gaining money. It increases our savings after a limited period.
In Simple Interest, interest is only estimated from the principal. And also interest is not added to the principal. But, with compound interest, after a separately compound term, the interest accumulated over that span is added to the principal so that the following estimation of interest incorporates the actual principal plus the previously acquired interest.
Suppose, you deposited $1000 to a bank for 2 years. And the bank provides a compound interest of 3% every year.
After one year, your balance will be $1030. Because 3% of $1000 is $30. That’s pretty simple.
But, in the second year, the interest won’t be counted on the initial principal of $1000. Rather than, it will be counted on your current balance of $1030. That will give you a compounded balance of $1060.9.
Daily Compound Interest Formula in Excel
Before we discuss the daily compound interest calculator in Excel, we should know the basic compound interest formula. The basic compound interest formula is shown below:
Here, n = Number of periods
So. suppose, you have an investment of $1000 for 5 years with an interest rate of 5% compounded monthly.
Monthly Compound interest will be:
As our article is all about the daily compound interest calculator, we can also compute the daily compound interest using that formula.
Daily Compound interest will be:
I hope this section gave you a proper idea about the daily compound interest.
Step by Step Guide to Create a Daily Compound Interest Calculator in Excel
In this section, we will provide you with a step-by-step guide to creating a daily compound interest calculator in Excel. It will be short but a compelling example. I hope you will follow this step-by-step method to get your ideas clear and implement them into your worksheet.
Take a look at the following dataset:
Here, our dataset contains some information to calculate the daily compound interest. And we are also going to find the earned or gained interest from this.
Here, we are using this formula:
You may wonder why we are using a different formula. We are not. If you take a closer look, this is the same formula. In the previous section, we were dividing this same formula into separate parts.
Now, follow the simple steps to find the daily compound interest in Excel.
📌 Steps
- First, type the following formula in Cell C9:
=C4*(1+C5/C6)^(C7*C6)
- Then, press Enter. After that, it will show you the Estimated balance.
- Now, to calculate the Gained Interest, simply type the following in Cell C10:
=C9-C4
- Again, press Enter.
As you can see, we are successful in creating a daily compound interest calculator in Excel. Now, you can use this workbook as your calculator. So, download the practice workbook and try with your own values.
Read More: Create Reverse Compound Interest Calculator in Excel
Test the Calculator for Daily, Monthly, and Yearly Compounding Periods: An Example
Now, in this section, we will show an example of compound interest. This example will contain the same dataset. But we will calculate differently compound interests.
Suppose, you want to invest $10000 for ten years somewhere. You have got three options:
Bank "X" is providing 5% interest compounded yearly.Bank "Y"is offering 5% interest compounded monthly.Bank "Z" is giving 5% interest compounded daily.
Now, you are in puzzlement where to apply. So, let’s use our calculator to find which one will provide you with more profit.
We have created a calculator before. So, we are using that to perform this. Just we have to change the values.
Computing Yearly Compound Interest for a Bank “X”:
Here, we are using this dataset to demonstrate all the examples:
📌 Steps
- First, type the following formula in Cell C9:
=C4*(1+C5/C6)^(C7*C6)- Then, press Enter. After that, it will show you the Estimated balance.
- Now, to calculate the Gained Interest, simply type the following in Cell C10:
=C9-C4- Again, press Enter.
As you can see, if we deposit our money to Bank “X”, our future balance will be $16,288.95.
Computing Monthly Compound Interest for a Bank “Y”:
Here, to calculate monthly compound interest, we going to do the same process as we did earlier.
📌 Steps
- First, type the following formula in Cell C9:
=C4*(1+C5/C6)^(C7*C6)- Then, press Enter. After that, it will show you the Estimated balance.
- Now, to calculate the Gained Interest, simply type the following in Cell C10:
=C9-C4- Again, press Enter.
As you can see, if we deposit our money to Bank “Y”, our future balance will be $16,470.09.
Computing Daily Compound Interest for a Bank “Z”:
If we calculate interest for Bank “Z”, it will show the following:
As you can see, if we deposit our money to Bank “Z”, our future balance will be $16,486.65.
Now, you can clearly determine the facts. If you deposit your money to Bank “Z” you will get more benefits.
So, our daily compound interest calculator in Excel is working really great not only for daily compound interest but also for yearly and monthly calculations.
Related Content: Make Quarterly Compound Interest Calculator in Excel
An Advanced Excel Function to Find the Compound Interest
Lastly, you can compute compound interest with Excel’s built-in Future Value Function. Equivalent to the earlier methods, the FV function estimates the future value of an asset established on the values of particular variables.
Syntax:
=FV (rate, nper, pmt, [pv], [type])
Arguments:
rate: Required. The interest rate for each period.
nper: Required. The number of compounding periods.
pmt: Required. The additional payment per period, and is represented as a negative number. If there is no value for “pmt,” put a value of zero.
pv: Optional. The principal investment, which is also represented as a negative number. If there is no value for “pv,” you must include a value for “pmt.”
type: Optional. Indicates when additional payments occur. “0” indicates that the payments occur at the beginning of the period, and “1” indicates that the payments are due at the end of the period.
Take a look at the following screenshot:
We have used this dataset previously, we are using it again so that you can verify the result.
📌 Steps
- First, type the following formula in Cell C9:
=FV(C5/C6,C7*C6,0,-C4)
Here, to acquire the rate (which is the period rate) we use the annual rate/periods or C5/C6.
To get the number of periods (nper) we use the (term * periods) or C7 * C6.
There is no periodic payment, so we use zero.
By pattern, the current value (pv) is input as a negative value, since the $10000 “leaves your wallet” and belongs to the bank during the period.
- Then, press Enter.
In the end, you can also use this function to create a daily compound interest calculator in Excel.
💬 Things to Remember
✎ In daily compounding, it is supposed that all the interest investments will be reinvested at the same rate for the investment period. But honestly, the interest rate never stays exact and changes.
✎ While computing compound interest, the number of compounding periods makes an influential difference. The higher the number of compounding years, the greater the compound interest.
Download the Template
Download the following Excel workbook. You can use the first worksheet as the template for your Daily Compound Interest Calculator.
Conclusion
To conclude, I hope this tutorial has provided you with a piece of useful knowledge to create a daily compound interest calculator in Excel. We recommend you learn and apply all these instructions to your dataset. Download the practice workbook and try these yourself. Also, feel free to give feedback in the comment section. Your valuable feedback keeps us motivated to create tutorials like this.
Keep learning new methods and keep growing!
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Everything you have here makes sense, but what if the loan doesn’t have a specific term? It gets paid off whenever it gets paid off.
Hi Laurie!
It feels good to know that you found our content understandable. Judging from you query, I think you want a continuing compound interest formula where the loan doesn’t have a specific term/year.
The term continuous compound interest is used to emphasize the continuous compounding of interest, as opposed to discrete compounding periods. Here, the compounding frequency becomes infinite, resulting in a continuous growth formula. Let us look at the formula below:
A=P0ert
Where,
For example, if you invest $1,000 at an annual interest rate of 5% continuously compounded for 2 years, the future value can be calculated using the continuous compounding formula.
Regards,
Nafis
ExcelDemy