By basic definition, compound interest is the concept of adding accumulated interest back to the principal sum, so that interest is earned on top of interest from that moment on. The act of declaring interest to be principal is called compounding. For an effective understanding of the compounding effect, we must have a clear idea of how things work exactly. Compounding frequency or the number of times per year the accumulated interest is paid out, or capitalized (credited to the account), on a regular basis is very important. This frequency may be in days, months, bi-annual or even annual. The effect of compounding depends on:
- The nominal interest rate which is applied and
- The frequency interest is compounded.
A compound interest calculator is a tool that allows calculating such compounding effect on loans or investments. Looking at the compound interest in depth and studying the basic formula for it allows us to understand how the frequency of compounding periods has a definite effect on our earnings or how much we have to pay in interest. This actually means that more the frequency of compounding periods, more is the interest that is accrued. This, therefore, inevitably means that we can earn more in interest from a bank or an institution that compounds daily than we can from a bank that compounds only monthly. Thus, logically, it follows that we will pay more in interest on a loan that compounds monthly compared to one that compounds annually. The nominal rate cannot be directly compared between loans with different compounding frequencies. Both the nominal interest rate and the compounding frequency are required in order to compare interest-bearing financial instruments.
Developing a clear understanding of compound interest and the way it functions in financial dynamics can help us assert our financial freedom and the power of our investments in a magnificent way. A complete understanding helps us move ahead with our personal finances without any worries of unwanted or unplanned expenditures. Moreover, this also inculcates financial discipline. Once we realize how our creditors compound the interest on the leftover balance on a monthly basis, we are more likely to try to pay off the debts as soon as possible. Conversely, knowing that we can make more money from our existing monetary resources definitely acts as an incentive for us to develop the habit of saving and to leave the core savings corpus untouched.
HDFC Life brings to you savings and investment plans that help in systematic and disciplined investment ensuring that you and your family achieve your financial goals. For details, click on the mentioned link: https://www.hdfclife.com/savings-investment-plans
Income Tax Slab 2021-22
February 17, 2020
Income Tax Return Guide - Details You Should Know
November 07, 2016
Best Tax Saving Investment Options in 2022 (FY 2022-2023)
November 08, 2016
Subscribe to get the latest articles directly in your inbox
14 Best Investment Options In India
October 30, 2018
Short Term Investments: Top 11 Short Term Investment Options For 2022
November 08, 2016
Insurance vs Investment - Did You Get the Right Financial Plan?
November 05, 2018
Popular & Recent Articles
How to Plan for Retirement as Per your Age
"The thumb rule for retirement planning is - the earlier you start, the more you save. However, with age, your priorities change too. So, you need to factor in the cost of living in the present vis- a -vis future."
HDFC Life Insurance Company Limited. CIN: L65110MH2000PLC128245, IRDAI Reg. No. 101.
Registered Office: Lodha Excelus, 13th Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalaxmi, Mumbai 400 011. Email: [email protected], Tel No: 1800-266-9777 (10 am to 7 pm). The name/letters “HDFC” in the name/logo of the company belongs to Housing Development Finance Corporation Limited (“HDFC Limited”) and is used by HDFC Life under an agreement entered into with HDFC Limited.
For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully before concluding a sale.
|BEWARE OF SPURIOUS PHONE CALLS AND FICTIOUS/FRAUDULENT OFFERS