Guide on Compound Interest and How to Use Compound Interest Calculator?
Do you want to calculate your interest savings? Use a compound interest calculator. You get complete details about interest and the principal amount in moments.
Compound interest calculates the principal deposited amount and the overall interest on the total previous savings. Compounding is the best way to increase your wealth.
Let’s make it simple to understand. Let’s say you have INR 100 in your savings. Now, the compound interest is 10% per annum. You want to save money for 5 years. Since we follow a compound interest, you will have INR 157 total. But if we had followed simple interest, the total value would be INR 140.
So, in compound interest, in the first year, you have INR 109. Now, your principal amount becomes INR 109. So, the next year, that total value is INR 119. This process goes on until the fifth year. That’s how your wealth increases exponentially.
You get big results with a high initial principal amount and long tenure.
Significance of Compound Interest
- Compound interest earned on a savings account helps build a nest egg faster than simple interest.
- Like the snowball effect, your savings continue to grow over time. You can measure it and know what amount you will have five years later.
- It becomes a kind of loop that grows your investment at a reasonable rate. The highlighting factor is that you don’t need to invest additional capital. This investment cycle has the potential to grow on its own.
- Therefore, many people are talking about the power of compound interest on the internet. Compound interest is no less than an economic phenomenon and an intelligent way to build up your finances and practically achieve all your financial objectives.
Benefits of compound interest-based investments
- Try to invest regularly in small amounts. You can accumulate a large amount over time by investing in small amounts.
- When you make a compound interest investment, you prefer to keep the tenure longer, as compounding works well for the longer term.
- The quicker the frequency of investment, the larger the interest earned.
- Make sure you put your investment in a scheme where you get higher returns, like a mutual fund investment or SIP investment.
Compound interest manual formula
There are a few formulas that you can use to calculate Compound interest; however, the following is a common and also an easy one:
A = P (1 + r / 100)n t
Each letter in the compound interest formula represents a pre-set value. These values are as follows:
A: Total amount you get at the end of the period
P: Principal amount in which you invest initially
R: Annual interest rate
N: Number of times the interest compounds year on year
T: Time over which the interest accumulates
Excel Formula
FV- Future Value
Rate- Interest rate
n- number of times interest calculation takes place
PMT- Any additional money if you are adding
PV- Initial Deposits take place if any
Type- Either number 1 or 0
0 means payments are due at the end of the period
1 means payment is due from starting
Compound Interest Calculator: How Does it Work?
The formula for calculating compound interest is
FV = PV (1 + r / n)n t
Where
P = Principal Amount
A = Compound Interest
R/r = Rate of interest
N/n = Number of times interest compounds in a year
T/t = Number of years
For instance, if you plan to invest Rs 10,000 for ten years at a 5% interest rate. Based on the formula, Rs 500 is the interest amount.
P = INR 10,000
r = 0.05
n = 1
t = 10
A = 10000 (1 + 0.05/1)10 = INR 16,288.95
So, the total interest you earned would be INR 6,288.95.
Difference between Simple interest and Compound interest
There are two types of interest – simple interest and compound interest. Here’s a fundamental difference between the two for your knowledge.
| Simple Interest | Compound Interest |
| Here, you only earn your interest on the principal amount. | In this case, you make interest on the principal amount and previous interest earned. It is getting interest on interest. |
| The primary investment remains the same. | The primary investment changes after every compounding cycle. |
| The formula to calculate simple interest is SI = (P x T x R)/100 | The procedure to calculate compound interest is CI = P (1+r/n)nt |
Top Factors that Will Impact Your Compound Interest Returns
Time: time is the first and foremost factor affecting your investment growth. The more time you give to your investment, the better. So, if you want to grow your wealth, go for a longer tenure.
Interest rate: Choose an investment scheme where you are getting a higher interest rate on investments.
Principal Amount: The higher the principal amount, the bigger the investment.
Steps to use the Compound Interest Calculator
- Firstly, use the slider to use the compound interest calculator.
- Choose the compounding frequency per your convenience: daily, weekly, monthly, quarterly, annually, and semi-annually.
- Then share the principal amount.
- Once you share the required details, the calculator will display the results. Benefits of a Compound Interest Calculator
- With a single click on the online compound interest calculator, you can figure out compound interest.
- A compound interest calculator will be a great financial tool for understanding how to grow money faster.
- Shares accurate results
- Using the compound interest calculator, you can easily find compounding and deposit intervals.
- The compound interest calculator is easy to use; only you are required to share the beginning amount, tenure, and interest rate offered by the financial institution. You will get results right away.
Final Thoughts
Overall, compounding is no less a power everyone should know about. It will help you streamline your financial goals and facilitate achieving them. A compound interest calculation is needed when you are willing to apply for a long-term loan. It is a foundational concept that works best for accumulating wealth.