Simple interest and compound interest are two of the most common methods for calculating the interest charged on banking products such as loans, bank deposits, etc. Knowing and understanding how simple and compound interests work is important for any investor.
Compounding is important to understand how your savings and investments grow with time. It is the process of gaining interest in past earnings. A compound interest calculator is a tool that helps you calculate this interest on your savings and also lets you figure the amount you will make if you deposit a fixed amount of money into an account for compounding at a fixed yearly rate of return.
This page aims to discuss the concept of compound interest calculators in more detail, including what it is, how it works, the benefits of compound interest calculators, and more.
Compound interest is the accumulated interest added to the original principal amount invested in deriving the compounded interest on an investment. It is the additional interest amount earned on the initial interest (pricipal and the interest earned).
It is important to note that the principal amount here also increases annually depending on how frequently you calculate the compound interest.
Let us understand the concept of compounding interest in detail with an example- Suppose you have invested an amount of INR 1,00,000 in a fixed deposit instrument for 5 years at 10%; the interest earned for the first year will be INR 10,000.
However, when your investment reaches its second year, the principal will not be Rs. 1,00,000 anymore, but the accumulated interest amount, plus the original principal amount.
So, in this case, the principal will be INR 100,000 + INR 10,000 = 1,10,000.
Likewise, the principal amount in the second year will be the principal of the previous year+ interest earned during this period, which is Rs. 110,000 + Rs.11,000 = Rs.121,000.
As mentioned in the above example, the interest earned gets added to the principal amount to calculate interest for the subsequent years, and that is what compounding is.
Here is a table that explains how interest is calculated on an investment when the interest is compounded.
The formula to calculate compound interest is -
A = P (1 + r/n) ^ nt
Where,
A= Compound interest or future value of the investment
P = Principal amount
r = Interest rate
n= Interest compounding frequency
t = Total tenure/ duration of the investment
Calculating compound interest on your investments manually can seem challenging.
A compound interest calculator makes the task quite simple and fast.
Detailed below is the formula you need to use to calculate compound interest-
Compound interest (A) = [P (1 + r/n)nt]
Lets us understand this better with a few examples.
Example 1
Suppose you invest INR 40,000 for 5 years at an interest rate of 10 percent; then returns for the first year would be: INR 40,000*10/100= INR 4,000
The interest will be calculated for the second year at INR 40,000 + INR 4,000 or INR 44,000. The interest will be INR 4,400 and so on for consecutive years.
Calculating these yearly interests manually is difficult and time-consuming. This is why a compound interest calculator can be used to make your calculations faster.
Example 2
Let's say you have deposited an amount of INR 4,000 in a bank paying an annual interest rate of 10%, compounded half-yearly, and want to know the balance after 2 years. Using the compound interest formula and putting the values in it, we can arrive at the below calculations:
P(Principal) = Rs 4000
r(rate of interest) = 10/100 = 0.10
n(no of times in a year the interest is being compounded) = 2 (half-yearly)
t(no of years) = 2
So, the balance after 2 years will be approximately INR 4,862.03.Today, several compound interest rate calculators are available online to make the calculations faster.
Example 3
The compound interest on the principal amount of INR 2,000 at the rate of 4 % per annum for 1.5 years, compounded half-yearly, would be calculated as given below:
principal amount p = 2000
rate of interest r= 4%
time period= 1.5 or 3 half years
Entering the values in the below formula, we will get -
A = P (1 + R/200)2n
= 2000 (1 + 4/200)3
= 2000 (204/200)3
= 2122
Compound Interest here will be = A – P i.e. 2122 – 2000 = 122
Example 4
Suppose Mr X has invested INR 5 lakh in FD for 5 years with 5% interest on the amount
that gets compounded quarterly. So, what will be the compound interest?
Here is how you calculate compound interest in this case:
Compound Interest formula A= P (1+r/n)nt
Where,
A = Final amount
P (principal amount)= Rs 5,00,000
r (rate of interest) = 5 percent or 0.05
n (compounding frequency)= 4
t (time period)= 5 years
nt = 20 (5*4)
The calculation here will look like this-
A = 5,00,000 (1 + 0.05/4)20 = Rs 6,41,018
This means that Mr X's investment of INR 5 lakh in five years compounded quarterly will be INR 6.41 lakh at 5% rate of interest per annum.
A compound interest calculator makes the calculation process much easier and more accurate. Here are some of the ways an online compound interest calculator can help you:
1. Earnings Estimation: Using an online compound interest calculator, you can determine the exact compound interest you will earn from your savings or investment. Using this information, you can better plan your short-term, medium-term, and long-term financial goals.
2. Determining Investment Amount: With an online compound interest calculator, you can accurately know the amount to invest in, generating a certain amount at maturity. This makes your financial planning more precise and allows you to achieve your financial goals.
3. Calculate Interest: You can know how much interest you will earn not only with the regular Fixed deposites but also with type of savings schemes. The Indian Government has annualised the interest on National Savings Certificates (w.e.f 2016) to keep deposit rates in line with the market. A compound interest calculator helps you easily determine how these National Savings schemes work.
4. Free Of Cost: The best part of a compound interest calculator is that it is completely free of cost. Additionally, it takes very less time (a few seconds) to show the results after inputting the different values. All you need to do is change the value, and you get results accordingly. This, in turn, enables you to compare different investment plans to optimise your returns efficiently.
5. Easy to Use: The compound interest calculator is very simple to use. The calculator lets you know the compound interest on your investment within no time. Once you enter the principal amount, rate of interest, and the total investment period, the calculator will show you how much you will earn from your investment.
The easiest way to calculate compound interest is using the compound interest calculator from Stable Money, which is available for free.
Here are the steps you need to follow to use this calculator:
1. Open the calculator and enter the principal or investment amount - This is the total amount (principal investment amount) you wish to invest for a particular time.
2. Investment tenure: The next step is to enter the total tenure or the investment period. This is the total time when you want to keep your money invested or deposited.
3. Rate of return: In the last step, you need to enter the rate of return that your investment is expected to earn.
After putting your values, the compound interest calculator gives you the value of your investment in a few seconds.
Here are some of the ways you can take advantage of the compound interest calculator:
1. Start investing early and regularly: Develop a habit of investing early on and regularly to allow your money and investments to reach their full potential.
2. Take care of the frequency of compounding intervals: Remember that the more frequency of compounding, the larger will be the interest earned on your investment. Therefore, it makes sense to select investments that pay interest more frequently.
3. Hold investments for a long term: When you keep investing for a long term, it helps you earn interest for a longer period, as compounding, as a principle, works well only in the long term.
When it comes to multiplying your investment in the long term, compound interest is an excellent way.A compound interest calculator is a useful tool that investors can use to calculate the expected financial result. It allows you to examine your investment prospects in great detail, considering various parameters such as the total amount invested, the interest rate, or the investment term
To calculate compound interest, you need to subtract the principal amount from the rise of the number of compound periods for the product of the initial principal amount by one plus the annual interest rate.
Compound interest is better than simple interest. This is because unlike simple interest, where you calculate interest only on the principal amount, in compound interest, the interest earned on the principal amount is added upon previously accrued interest, thus helping you generate wealth faster
The future value of an investment is the total value of an investment after the said maturity period.
No documents are required to calculate the compound interest using the compound interest calculator.
Online compound interest calculators. can accurately manage interest rate fluctuations.
No, there is no limit to using the online compound interest calculator. It's available anytime you require it.
In general, compound interest is used in calculating returns on fixed deposits, recurring deposits, savings accounts, mutual funds, bonds, dividend stocks, and other real estate investments.
