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₹10,000/ Annually
₹ 0/ in 12 years
Power of Compounding Calculator
Have you ever wondered why experts always ask you to invest early or for as long as you can? It is mainly because of earning interest or return on the returns you have already earned. Are you wondering how can one earn a return on the return already generated? So, the answer to your question is the power of compounding. With the help of the magic of a compounding calculator, you can easily find out how you can earn compound interest on your investments.
This article will help you understand –
What is compounding?
Compounding is one of the most basic yet compelling concepts of mathematics which is used mainly for measuring the returns earned on different investments as well as interest payable on loans. So, whether you invest some money or borrow some, you will earn interest or pay the same. So, when you earn or pay interest on the sum of money invested or borrowed it is known as simple interest.
However, when the interest you earned on your investments or payable on your loan is added to the principal amount and on the resultant amount, the interest rate is levied, it is called compounding.
What is Compound Interest?
To understand compounding better, let's understand compound interest first. Compound interest is nothing but in simple terms, interest on interest. This means the interest you earn on your investment, is reinvested and then interest is earned on the total amount and this process continues.
Compound Interest Formula & Steps to Calculate Compound Interest
The formulae for compound interest are as follows -
Compound Interest
= [Principal (1+ interest rate) number of periods] – Principal
= [P (1+i) n] – P
= P [(1+i) n – 1] Here,
Here,
- p
Enter the amount that you invested that is the principal amount or P
- i
Then check the interest rate which is the ‘i’
- n
‘n’ is the tenure for which you are investing
Now once you have these variables you can just arrange them according to the formulae given above and then you can calculate. It is easier to calculate compound interest using a compound interest calculator.
For understanding compound interest better, let's take an example.
Suppose you have invested Rs. 10000 for 5 years and the interest rate is 10% p.a compounding annually. So, here is how it will work –
| Year | Principal | Interest Amount | Total Amount |
|---|---|---|---|
| 0 | 10000 | 1000 | 11000 |
| 1 | 11000 | 1100 | 12100 |
| 2 | 12100 | 1210 | 13310 |
| 3 | 13310 | 1331 | 14641 |
| 4 | 14641 | 1464 | 16105 |
| 5 | 16105 | 1610 | 17715 |
So, as you can above, the interest which incurs on the principal is added back to the principal and thus the interest amount increases every time too, with the interest rate being equal. This is how compound interest is calculated.
How does compound interest works?
As you can see in the above table in the above section, Compound interest works in a simple manner when interest for a period is added to the main principal amount and then the interest for the next tenure is calculated on that total sum of money.
Simple Interest and Compound Interest Calculator
Simple interest and compound interest calculators are one of the most important financial tools for every individual. While simple interest calculates interest on the original principal, compound interest calculates the interest rate on the accumulated principal.
Suppose, you invested Rs. 10000 for 5 years and the rate of interest is 10%. So, the simple interest would be Rs. Rs. 1000 for each of the five years. This means the total interest will be Rs. 5000 at the end of the investment tenure. While in the case of compound interest, as you can see above, the total interest is Rs. 7715.
Simple Interest Formula
The formula for calculating simple interest is the one we have read in school that is –
SI = PRT/100
Here,
- p
Principal Amount
- n
Rate of Interest
- r
Investment Tenure
How does compounding works?
To understand how compounding works, you need to know that time is an important factor for compounding interest. The frequency is the key to higher returns and thus, compounding can happen –
- icon
Annually
- icon
Half-yearly
- icon
Quarterly
- icon
Monthly
- icon
Daily
- icon
Every Hour
Let’s take an example to see how it works by taking the most common compounding frequencies which are – annually, quarterly, half-yearly, and monthly.
Let’s assume, you have invested Rs. 10000 at an interest rate of 10% per annul for a tenure of 10 years. Here is how your total investment will change according to compounding frequency -
| Compounding Frequency | No. of Compounding Periods | Values for Interest (i) and Number of periods (n) | Total Interest Amount (INR) |
|---|---|---|---|
| Annually | 1 | i =10%, n = 10 | 15937.42 |
| half-yearly | 2 | i = 5%, n = 20 | 16532.98 |
| Quarterly | 4 | i= 2.5%, n = 40 | 16850.64 |
| Monthly | 12 | i= 0.833%, n = 120 | 17070.41 |
The above calculations are based on the formula of compounding interest that is also used by the compound interest calculator. The basic formula is
Compound Interest
= [Principal (1+ interest rate) number of periods] – Principal
= [P (1+i) n] – P
= P [(1+i) n – 1] Here,
If you are thinking that calculating compound interest is quite a task, then you do not have to worry as technology has given us a compound interest rate calculator with which you can easily calculate returns on your investments for any compounding frequency without any hassle.
What is a compounding calculator?
A compound return calculator can be referred to as a tool for calculating how much interest or return you can generate over a particular tenure, given a particular compounding frequency on a specific investment amount. This calculator works on the simple rule of compounding and uses the formula stated above. However, you do not have to use any excel sheet or break your head by calculating and adding the interest for every period. You just need to enter the amount of investment which is referred to as the principal amount, the investment period which is the number of years for which you are investing, and the rate of return you are expecting and the frequency of compounding. After entering these details, the compound investment calculator will give you the result.
How can you use a compounding calculator?
Usually, the compound interest calculator online has the following aspects –
- Type of investment – you can choose a lump sum or monthly (SIPs)
- Compounding interval or frequency – annually/ quarterly/ monthly/ semi-annually/ daily
- Investment period – you need to choose the number of years
- Rate of return – You can enter the expected rate of return
Once you enter all these details, you will see, graphs and also numeric returns of how much you have invested or will invest for the investment tenure selected, and the total return you are expected to earn.
Let’s understand this with another example –
Person A
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Monthly
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10 years
-
12%
-
Rs. 5000
-
Quarterly
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Rs. 600000
Rs. 1131019
Person B
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One-time
-
10 years
-
12%
-
Rs. 500000
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Monthly
-
Rs. 500000
Rs. 1650193
So, as you can see in the above table, person A invested Rs. 5000 per month for 10 years and person B invested Rs. 5 lakhs in one go. Both are having the same investment tenure and rate of return but different compounding frequencies and thus the total returns are also different.
You can calculate returns by changing the variables on the compound calculator and easily can compare and find out which investment options are right for you.
While you do not need to calculate step by step to reach your ultimate goal which is the total return using these online compounding calculators but it is always beneficial to understand the mechanism behind the tool and it will also help you gain better insights about compounding.
| Year | Opening Balance (P) | Interest @ 10% (I) | Closing Balance (P+I) |
|---|---|---|---|
| 1 | 10000 | 1000 | 11000 |
| 2 | 11000 | 1100 | 12100 |
| 3 | 12100 | 1210 | 13310 |
| 4 | 13310 | 1331 | 14641 |
| 5 | 14641 | 1464.1 | 16105.1 |
| Total | 6105.1 | 16105.1 |
If it would have been a simple interest then on your investment of Rs. 10000 you would have earned Rs. 5000 interest while due to compounding you earned Rs. 6105.1 as total interest.
Benefits of compounding calculator
While the above example showcases the power of a compounding calculator, however, there are many other benefits of this unique tool as well which includes -
Simple yet effective
The compound calculator is one of the simplest innovations of technology however, it is one of the most popular as well due to its ease of use and the importance of compound interest in daily lives. It has no complicated data that users are required to input, only a few necessary data will help you get the required results.
Online and free
Most of the compound interest rate calculators available online are free and you can use them anytime you want and as many times as you want. So, you can compare different investment options for different compounding frequencies and a lot more.
Helps in investment planning
Since you can compare different investment options using this compound interest calculator, it would become easy for you to plan your financial future and investment wisely.
Saves time and effort
Without the calculator, if you need to calculate the compound interest on comparing different investment options, you will have to sit for hours with excel or a physical calculator and calculate the numbers for every frequency, and tenure which can be time-killing and also hectic. With the compound calculator, it just takes a few seconds to calculate these cumbersome calculations.
Conclusion
Compounding has been referred to as the 8th wonder by Albert Einstein and is also one of the biggest inventions of mankind. This phenomenon helps investors to generate inflation-beating returns and in turn, helps them in the future by accumulating a significant corpus. While this is a boon for the investors as they earn a higher rate of return on their investments, the same can be a curse for the borrower as they have to pay higher interest charges. However, by using a compound interest calculator, you can make your choices wisely.
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Frequently Asked Questions about Compound Interest
Are these compound interest calculators free to use?
Yes, all these compound interest calculators are free to use. You can use them online or download them if the application version is available.
Do I need an internet connection for using this calculator?
Most of these calculators are online but you can also use some of the offline compound interest calculators. However, it is easy and more accurate to use the online ones.
Can I compare different investments using a compounding calculator?
Yes, you can compare different investment options just by altering the variables in the compound calculator. You can change the principal amount, interest rate and tenure and the calculator will give you different results which you can compare with each other.
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Disclaimer
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