# Compound Interest Calculator

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In the investment spectrum, compounding is synonymous with building wealth over time. Compounding, or compound interest, is when you earn interest on the initial principal and previous interest amounts. Since the interest is added to the initial investment and the new interest, the asset continues to grow throughout the investment period. You can use a compound interest calculator for ideal investment planning.

Compound interest is a financial process to calculate interest on the investment amount, including the initial principal amount and all the accumulated interest over time. Also known as Compounding interest, such interest can be for a loan, deposits, or investments.

One way to think of compound interest is as "interest on interest,” as it creates a chain reaction of interest calculations based on the accumulated amount. Compared to simple interest, which is calculated solely on the principal amount, compound interest ensures better returns on investments. It adds the accrued interest before calculating future interest payments.

The frequency of compounding determines the rate at which compound interest accumulates. For example, over the same period, the compound interest accrued on Rs. 1,000 compounded at 10% annually will be less than that on Rs. 1,000 compounded at 5% semi-annually.

When an investment or a deposit has a compound interest rather than simple interest, it substantially increases the volume of returns. For example, for an investment of Rs 1,000, if the simple and compound interest is the same at 10%, the simple interest will always be Rs 100. However, the returns will increase based on the compound interest as after the first interest cycle, Rs 100 interest will be added back to Rs 1,000 to calculate the following interest on Rs 1,100.

Thus, the magic of compound interest allows individuals to earn more over time and increase their investments by a hefty margin. Therefore, it is vital to calculate compound interest using a compound interest calculator and compare the returns with the same investment tools having simple interest to make informed financial decisions.

Suppose you invest Rs 1,000 in an instrument that provides eight per cent returns annually with compound interest. In the first year, the principal amount would be Rs 1,000, and the investment instrument will provide Rs 80 as the interest amount for the first year.

In the second year, you invest Rs 1,000 again. When you calculate compound interest through the formula or using a compound interest calculator, you will see that the calculation includes accumulated interest for future calculations.

The interest is calculated for the second year based on the principal amount for the two years (Rs 2,000) and the interest from the last year (Rs 80). In the case of compound interest, the 8% interest calculation for the second year is done for the amount of Rs 2,080 (1,000+1,000+80). When calculated, the interest comes to Rs 166.40.

Similar to the second year, let’s say you contribute Rs 1,000 again for the third year. For this year, the interest for the second year is added back to the Rs 2,080 and the Rs 1,000 you contributed this year. Hence, an 8% compound interest calculation is done on Rs 3,246.40 (Rs 2,080+166.4+1,000), i.e., Rs. 259.71. This cycle repeats every year to build wealth over time. However, a compound interest calculator in India makes it easy to determine interest payments.

There are two ways to calculate compound interest on any deposit or investment instrument; a mathematical formula or a calculator for compound interest. Although using a calculator for compound interest is easier and more accurate, it is essential to understand the mathematical formula to understand how compound interest works.

Without using a compound interest calculator, you can use the following equation to determine compound interest:

Compound interest = total amount of principal and interest in future (or future value) minus principal amount at present (or present value)
= [P (1 + i)n] – P
= P [(1 + i)n – 1]

Where:
P = principal
i = nominal annual interest rate in percentage terms
n = number of compounding periods

Example: Consider an Rs. 10,000 loan with a 5% interest rate that compounds every year. Using the mathematical calculation, the compound interest would be: Rs. 10,000 [(1 + 0.05)3 – 1] = Rs. 10,000 [1.157625 – 1] = Rs. 1,576.25.

Although you can use the mathematical formula to determine compound interest, there is always a possibility of committing manual mistakes, which can highly alter the results. You may invest a lower or high amount with the wrong compound interest calculation to earn the desired interest rate.

Using a calculator for compound interest is straightforward and needs you to enter certain details to know how much interest you will earn. You can follow the below steps to determine your compound interest.

Step 1: The first step is to enter your initial investment amount in the compound interest calculator. This will be the principal amount to which all the following investment amounts and the accumulated interest will be added.

Step 2: Select the rate of interest attached to the investment instrument. You can either use the slider or manually enter the compound interest rate in the calculator.

Step 3: Select the period for which you want to determine the compound interest rate. You can use the slider or manually enter the number in years. The time is the years you would want to hold the investment instrument before selling or the loan tenure if it is a credit instrument.

Step 4: Choose the compounding frequency from the drop-down menu to select the frequency from quarterly, half-yearly, or yearly.

Step 5: Once you have entered all the details in the compound interest calculator, you will get the results depicting the Principal Amount, Total Interest Payments, and Total Value of the investment for the selected period.

A compound interest calculator is an ideal digital tool that various lenders and stockbrokers have designed to ensure one can determine the compound interest payments with the value of their principal amount for a specific period. There are numerous benefits of a calculator for compound interest:

●    Easy-to-use: A calculator for compound interest is a digital tool that is easy and straightforward to use. All you have to do is enter some details, such as the principal amount, rate of interest, time, and the compounding frequency, to calculate the compound interest in a matter of seconds.

●    Accurate: The calculator for compound interest allows you to calculate compound interest with the most accurate results. The calculator is backed by advanced algorithms that ensure the highest accuracy when compared to manually using the mathematical formula.

●    Flexibility: Using a calculator for compound interest allows you to tweak the different factors, such as the principal amount, rate of interest, etc., until you find the most suitable results. Based on this flexibility, you can figure out how much principal amount you may need to earn a certain rate of interest along with the period and compounding frequency.

●    Free-of-cost: Most financial institutions have created interest rate calculators as free add-on services. You can visit their websites and calculate the compound rate free of cost.

## FAQ’s

Daily, monthly, and yearly compounding are compounding frequencies attached to an instrument that offers compound interest rates. You can choose plans where the interest is accrued daily, monthly, six-monthly, or annually.

For example, with daily compounding, the interest will be accrued daily. With monthly compounding, it will accrue monthly, and with yearly, it will accrue once a year. The more time your money has to compound and grow, the more you will end up with.

Simple interest is calculated only on the principal amount and the following investment amounts without adding the accrued interests. On the other hand, compound interest calculates the interest after adding all the accrued interest with the principal and the following investment amount.

• The longer money sits in a compound interest account, the more benefit you will reap over the long term.
• With inflation, the costs of services and goods increase gradually and causes the purchasing power of currency to decline.
• Investing money in compounding interest accounts can be a good source for long-term cash management plans.

Compound interest investments are those investment instruments that provide compound interest to the investors rather than offer simple interest. The idea behind compound interest investments is to multiply the investment amount quicker than those having simple interest.

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