Daily Compound Interest
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How to calculate daily compound interest
With some types of investments you might find that your interest is compounded daily, meaning that you're earning interest on both the principal amount and previously accrued interest on a daily basis. This is often the case with some bitcoin and crypto currency trading platforms. When interest is compounded so frequently on a fixed basis, it can mean that the interest accrued increases quickly, as every day's interest figure is bigger than the previous day.
Daily compound interest is calculated using a simplified version of the compound interest formula.
Formula for daily compound interest
The formula used for daily compound interest, with a fixed daily interest rate, is:
- A = the future value of the investment
- P = the principal investment amount
- r = the daily interest rate (decimal)
- t = the number of days the money is invested for
Let's use the example of $1,000 at 0.4% daily for 365 days.
- P = 1000
- r = 0.4/100 = 0.004
- t = 365
Let's put these into our formula:
A = P(1+r)t
A = 1000(1+0.004)365
A = 1000 * 4.2934377972993
A = 4293.4377972993
To get the total interest, we deduct the principal amount (1000) from the future value. This gives us interest of $3293.44
What is the daily reinvest rate?
The daily reinvest rate is the percentage figure that you wish to keep in the investment for future days of compounding. As an example, you may wish to only reinvest 80% of the daily interest you're receiving back into the investment and withdraw the other 20% in cash.
Let's look at an example. If your initial investment is $5,000 with a 0.5% daily interest rate, your interest after the first day will be £25. If you choose an 80% daily reinvestment rate, $20 will be added to your investment balance, giving you a total of $5020 at the end of day one. The remaining $5 will be withdrawn as cash.
FAQ - Deduct w/e from time
The option to deduct weekends from the years, months, and days figure you've entered, allows you two options for compounding when excluding weekends. Let's look at each option with an example of a one-year calculation...
- You want to compound for one year minus weekends (one year, net of weekends). This means your figure will compound for around 261 BUSINESS days, with an end date 365 days from your start date, depending on when the weekends fall.
- You want to compound for one year, with weekends excluded from the time (one year gross). This means your figure will compound for 365 BUSINESS days, with an end date around 509 days from your start date, depending on when the weekends fall.
If you have any questions about this daily compound interest calculator, please get in touch.