Famous scientist Albert Einstein once famously said that "Compound interest is the 8th wonder of the world. He who understands it earns it, and he who doesn't pays it."
The concept of compounding is compelling. If we summarize the idea in simple terms, compound interest is interest on interest. Compound interest is when the principal includes the accumulated interest from previous periods, and the following interest is calculated on this. Loans, deposits, and investments are all subject to compounding. The number of times interest is calculated in a year is known as compounding frequency. The most common compounding frequencies are daily, weekly, monthly, quarterly, half-yearly, and annually.
The compound interest calculator shows you how your money can grow by compounding interest. You can also use the compound interest calculator to see how different interest rates and loan lengths affect the amount of compounded interest you'll pay on a loan. The compound interest calculator online works on the compound interest formula. You will have to input the principal amount, the frequency of compounding, your investment tenure, and the expected rate of return. The compound interest calculator displays the results as the maturity amount at the end of investment tenure.
You can understand the calculation of compound interest with this simple example-
Say you have Rs.100000, and you are investing it for three years at 10% per annum compounded annually. For the first year, the interest will be Rs.10000 (100000*10%) on the principal Rs.100000. For the second year, the principal will be Rs.110000 (100000+ first-year interest 10000) and interest will be Rs.11000 (110000*10%). Continuing this pattern, in the third year, the principal will be Rs.121000, and interest will be Rs.12100. At maturity, you will get Rs.133100 as the maturity amount.
Since the example was for three years, it was easy to compute. But what if the tenure is longer? For this, the compound interest is calculated for any given interest and term using a formula. To calculate principal and interest, the compound interest calculator employs the compound interest formula. Compound interest is calculated using the following formula:
A (Maturity amount) = P (1 + r/n) ^ nt
In the above formula, P denotes the principal amount, r denotes the annual interest rate, n represents the compounding frequency (number of times the interest is compounded) in a year, and t means the number of years.
Let's refer to an example to understand the calculation in a better way. Suppose you invest Rs.10000 for five years in an investment offering a compound interest of 10% per annum. As per the formula, the maturity amount will be-
A= 10000 (1+0.1/5) ^ 5*1 = Rs.16105.1
Out of this, the portion of accumulated interest will be
Compound interest= Maturity amount – Principal = 16105.1- 10000 = Rs.6105.1
You can use this result to determine whether a particular investment is worthwhile, as well as for planning how you will spend the money in the future.
You can earn interest on the money you've saved/invested, and the interest component of your investment earns interest.
The longer your money sits in a compound interest account, the greater the benefit. Even a difference of 1% in the interest rate can increase your gains significantly in the long run.
Inflation degrades the purchasing power of money as the cost of services and goods rises over time. The effect of inflation can be mitigated by putting money into investment avenues that pay compound interest.
Compounding interest accounts can be a great source of funds for a long-term cash management strategy.
The higher the interest compounding frequency, the more money you'll make from your investment. For example, instead of compounding interest annually, the rate of return will be higher if it is compounded quarterly.
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Interest earned on the original principal plus accumulated interest is referred to as compound interest. You're not only earning interest on your initial deposit, but you're also earning interest on your interest. Consider compound interest in the same way that the "snowball effect" occurs. A snowball begins small, but as more snow is added, it grows larger. It gets bigger at a faster rate as it grows.
When your investment earns interest, the magic of compound interest helps it to grow faster. It will calculate the newly made interest by calculating the initial capital invested and the gained interest when it earns interest again. Thus, interest will be added to the total investment amount as the size of the investment grows. This loop will continue to allow the investment to increase significantly without the need for additional capital. This cycle has the potential to expand the original investment considerably over time.
Yes, you can calculate your returns on National Savings Certificates using the compound interest calculator online.
A fixed percentage of interest is added at a fixed frequency for a set period in simple interest. Every time the interest is added, the principal remains the same, and just a fixed amount of interest is added to the principal amount. On the other hand, compound interest causes the principal to grow because the interest earned on principal earlier is also added while calculating interest.
An investor can use a compound interest calculator to figure out how much interest he or she will earn at various interest computation frequencies. On a daily, monthly, quarterly, half-yearly, or yearly basis, for example. The frequency with which interest would be compounded affects the total interest earned on the deposit.
The formula for calculating compound interest monthly is
CI = P (1 + r/n) ^ nt
Here, n stands for the compounding frequency. When calculating compound interest for 12 months, the compounding frequency is 12, that is, monthly.
You can take advantage of the power of compounding as a mutual fund investor. if you invest in a dividend reinvestment plan of a mutual fund scheme, you would receive a dividend from time to time. If the dividend is reinvested back in the mutual fund, it would allow you to purchase a larger number of units in the scheme. Now, you'll start earning a dividend not only on the original units that you had purchased, but also on the new units received through the dividend reinvestment. this has a potential to grow your investment at a faster pace.
The compound interest per month is calculated using the monthly compound interest formula. The formula is-
CI = P (1+ [r/12]) ^ 12t - P
Here P is for the principal amount, r is the decimal interest rate, and t is the time
The formula for calculating annual compound interest is as follows-
CI = P (1+ r/n) ^ nt
Where P represents the principal amount, t is the tenure, r is the rate of interest and n is the compounding frequency.
Compound interest investments are investments in assets such as Certificates of deposits, equity and debt mutual funds, bank FDs, National Pension System, Public Provident Fund, Senior Citizen's Savings Scheme, and RBI taxable bonds that benefit from compounding.
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