Compound Interest Calculator
Compounding is when you earn interest on your investment over a period of time, due to which you witness growth in your earnings. The power of compounding enables your earnings to grow as your investments grow. Here's how you can understand this better. Interest is added to the initial investment (principal amount), which is the compound interest. Since the amount would be added to the initial investment and the new interest is calculated on this amount, the investment will continue to grow as this process would be consistent all throughout the investment period.
Compounding is when you earn interest on your investment over a period of time, due to which you witness growth in your earnings. The power of compounding enables your earnings to grow as your investments grow. Here's how you can understand this better. Interest is added to the initial investment (principal amount), which is the compound interest. Since the amount would be added to the initial investment and the new interest is calculated on this amount, the investment will continue to grow as this process would be consistent all throughout the investment period.
The interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods is known as compound interest (also known as compounding interest). One way to think of compound interest is as interest on interest. Compared to simple interest, which is calculated solely on the principal amount, it will cause a sum to grow more quickly.
The frequency of compounding determines the rate at which compound interest accumulates. The compound interest increases with the number of compounding periods. As an illustration, over the same period, the compound interest accrued on Rs. 1000 compounded at 10% annually will be less than that on Rs. 1000 compounded at 5% semi-annually.
Compound interest is calculated by multiplying the initial principal amount by one and the annual interest rate raised to the number of compound periods minus one. The resultant value is then reduced by the full initial loan amount.
The formula for Compound Interest:
The following equation can be used 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. What would the interest rate be? This is what it would be:
Rs. 10,000 [(1 + 0.05)3 – 1] = Rs. 10,000 [1.157625 – 1] = Rs. 1,576.25
- Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. As the initial investments and the income received from those investments grow together, compounding can produce a snowball effect.
- Your savings will compound more quickly the higher your initial investment and investment return. And it can really add up over time. Early and frequent savings can help you take advantage of compound growth by putting money to work for you instead of you having to!
FAQ’s
You can choose plans where the interest is accrued daily, monthly, six-monthly or annually. Compounding will always work best when the interval of compounding is short.
You can also opt for daily interest accrual, which means your interest will be compounded every single day. So, every day you will earn a new amount based on the interest added to your initial investment. The more time your money has to compound and grow, the more you will end up with.
There are a number of investment opportunities today where you can benefit from plans that compound interest at regular intervals. The interest you earn from the bank, in every 6 months is added to your savings, and for the next six month, you can earn interest on the new amount.
Mutual funds and Unit-Linked Insurance Plans (ULIPs) are two of the most common investments that utilize compound interest formulas to grow your money.
- 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.