Compound Interest Calculator
A Comprehensive Guide To Compound Interest Calculator
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.
What is compound interest?
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 (principal 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.
Difference between simple interest and compound interest
|Principal Amount||Year||Interest Earned During The Period|
|Rs 100000+10000 = Rs 110000||2||10000|
|Rs 110000+11000= Rs 121000||3||12100|
|Rs 121000+12100= Rs 133100||4||13310|
|Rs 133100+13310= Rs 146410||5||14641|
Compound interest formula
The formula to calculate compound interest is -
A = P (1 + r/n) ^ nt
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
How to use a compound interest calculator?
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]
- A= Compound Interest
- P = Original principal amount
- R = Rate of interest per annum
- N = Number of times in a year the interest gets compounded
- T = Time or duration of the investment
Example 1Suppose 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 2Let'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
|Period||Compound Interest Calculation|
|1st half-year||Compound interest=
5% × Rs 4000 = (5/100) × 4000 = Rs 200
Amount = Rs 4000 + Rs 200 = Rs 4200
|2nd half-year||Compound Interest = 5% × Rs 4200 = 5/100 ×
4200 = Rs 210
Amount = Rs 4200 + Rs 210 = Rs 4410
|3rd half-year||Compound Interest = 5% × Rs 4410 = Rs 220.5
Amount = 4410 + 220.5 = 4630.5
|4th half-year||Compound Interest = 5% × Rs 4630.5 = Rs 231.53
Amount = Rs 4630.5 + Rs 231.53 = Rs 4862.03
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 3The 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
Compound Interest here will be = A – P i.e. 2122 – 2000 = 122
Example 4Suppose 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
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.
How can an online compound interest calculator help you?
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. Gives You The Return Estimates You Will Earn From Your InvestmentUsing 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. It Allows You To Determine The Amount You Need To InvestWith 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 On National Savings CertificatesThe 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 CostThe 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. Makes Calculations EasyThe 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.
How to use compound interest calculator?
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:
- 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.
- 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.
- Rate of return: In the last step, you need to enter the rate of return that your investment is expected to earn.
Here are some of the ways you can take advantage of the compound interest calculator:
- 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.
- 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.
- 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