InvestorQ : How can I use compound interest to know how much to invest for my varied financial goals?
Tanya Mehta made post

How can I use compound interest to know how much to invest for my varied financial goals?

Answer
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Tarun Madaan answered.
2 years ago


It is commendable that you are working on your financial goals! So, financial planning and goal setting this is a very practical concept. One that must be used by every individual to chase their dreams and have a fulfilling life.
When you set your goal, you also set an approximate expense along with it. Once you know how much amount you will need for your goal, you can start planning, saving and investing for it.
By using the compound interest formula, you can easily determine how much you need to invest today to get the lump sum amount you might need for your financial goal. The formula of compound interest is A = P (1+r/n)^nt where,
- A is future value
- P is present value or principal amount
- r is the interest rate
- t is the number of years the money is deposited for
- n is the number of periods the interest is compounded each year.
Interest is compounded only once a year so you can ignore the second ‘n’ in the formula.
Usually, this formula is used to calculate the amount an individual will get on maturity or redemption of the investment. However, it can also be used to help you set a target for your financial goal.
So, using the same formula, A = P (1+r/n)^nt, if you know the value of A, which is the final amount you want for your financial dream and is your target amount, and assume ‘r’ for an investment, you can easily calculate your principal amount.