Compound Interest Calculator

You can calculate compound interest with a simple formula. It is calculated by multiplying the first principal amount by one and adding the annual interest rate raised to the number of compound periods subtract one. The total initial amount of your loan is then subtracted from the resulting value.

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)

Compound Interest = P [(1 + i) n – 1]

P is principal, I is the interest rate, n is the number of compounding periods.

An investment of ₹ 1,00,000  at a 12% rate of return for 5 years compounded annually will be ₹ 1,76,234. From the graph below we can see how an investment of ₹ 1,00,000 has grown in 5 years.

In compound interest, one earns interest on interest. Therefore, it already takes into consideration all the previous interests. And interest is paid on that.

By understanding how compound interest works and acting on it by investing in the right set of investments, you can achieve high returns.

Simple interest is applicable for money borrowed for a fixed period of time. While compound interest is applicable whenever the interest is up for payment it will be added back to the principal amount.

Below are the top differences between Simple Interest and Compound Interest:

If you make a sound investment, compound interest can help you to build your wealth over time. But if your debt is subjected to compound interest, then it can cause financial hardship if not planned. To understand how compound interest works, let us break down the process of how your investment can compound better.

Compound Interest starts when your investment earns interest. At this point, the interest is added to the initial investment amount. When it earns interest again, it will determine the newly earned interest by calculating the initial capital invested and the earned interest.

As the size of the investment continues to grow, it will earn interest to the total investment amount. This loop will continue allowing the investment to grow substantially without any additional investment capital. With time, this cycle has potential for a substantial growth of the original investment.

Here are the two factors that will have an impact on your compound interest returns:

• Time - You need to allow your investments to grow with time, the more time you enable, the more growth you will see.
• The rate of interest - A higher rate of interest will generate higher balance when compounding the investment.

You can decide your investment priorities and goals, keeping in mind the various scenarios & avenues and how it will impact your life.

The bottom line is that if you are able to harness the advantage of compound interest then it can work wonders for your investment plan and financial goals.

If you are concerned about not being able to save enough for your child's education or retirement, then why not pick an investment avenue with compound interest? It has the potential to grow your wealth and anyone can take advantage of the many benefits as listed below:.

• You can earn interest on both the money you have saved and on the interest that money earns. For instance, If you invest ₹ 5000 and receive 5% annual compound interest, at the end of the year you will have ₹ 5,250 in your account. In your second year, interest will be calculated on ₹ 5,250 and with every passing year, the amount accumulated will have the interest paid on the balance and grow your wealth.
• The longer money sits in a compound interest account, the more benefit you will reap over the long term. A difference of even 1% in the interest rate will increase your capital gains.
• With inflation, the costs of services and goods increase gradually and causes the purchasing power of currency to decline. Putting cash in investment avenues with compound interest can mitigate the negative effects of inflation.
• If you are unable to manage cash well, you won't be able to stay afloat. You need cash to fund your daily needs and to plan for long term goals. Hence, investing money in compounding interest accounts can be a good source for long-term cash management plan.