Calculating Compound Interest in Excel: Savings Account with Monthly Additions

Calculating Compound Interest in Excel: Savings Account Monthly Additions

Compound interest is a powerful tool that can help individuals grow their savings over time. It is the interest earned not only on the initial investment, but also on any interest previously earned. In this article, we will discuss how to calculate compound interest in Excel for a savings account with monthly additions, using the formula that considers the incoming money as part of the account on a 360-day basis.

Understanding Compound Interest

Compound interest is the interest earned on both the initial principal and any interest previously earned. This type of interest is typically calculated and added to the account balance at regular intervals, such as annually or monthly, and can help individuals grow their savings over time.

To calculate compound interest, the formula used is:

Where:

• A is the final amount
• P is the principal amount
• r is the annual interest rate (as a decimal)
• n is the number of times the interest is compounded per year
• t is the number of years

Considering Monthly Additions

In this article, we will consider a savings account with monthly additions. This means that, in addition to earning interest on the principal amount, the account will also earn interest on any money added to the account each month.

To account for these monthly additions, we will consider the incoming money as part of the account on a 360-day basis. This means that we will divide the number of months by 12 to get the number of times the interest is compounded per year (n), and we will consider the number of months as the number of years (t) in the compound interest formula.

Calculating Compound Interest in Excel

Now that we understand the formula for calculating compound interest with monthly additions, let's see how we can do this in Excel.

First, we will need to set up our spreadsheet with the following columns:

• Month
• Principal Balance
• Interest Earned
• Monthly Addition
• Ending Balance

Next, we will need to enter the following formulas:

We can then drag these formulas down for each month to calculate the interest earned and ending balance for the entire year.

References

• Investopedia. Compound Interest. https://www.investopedia.com/terms/c/compoundinterest.asp
• The Balance. How to Calculate Compound Interest. https://www.thebalance.com/calculate-compound-interest-357516
• Excel Easy. Calculate Compound Interest. https://www.excel-easy.com/examples/compound-interest.html