Compound Interest Calculator

Compound Interest Calculator

Saving money is essential to invest your savings and earn returns. When it comes to investments, different avenues are available, each with its own set of features and benefits. Most investors look at the returns from an investment. They choose schemes with the highest returns for maximum gain.

There are two ways of calculating interest on an investment. One is the simple interest method, and the other is the compound interest method. Most investment avenues use the compound interest method to yield higher returns. Let us understand compound interest, how it works, and how you can calculate it.  

What is Compound Interest?

Compound interest is a mode of interest calculation wherein you earn interest on the interest you earned previously. Confused? Let us simplify things.

Under compound interest, the interest is, first, calculated on the amount you invest or deposit. The interest earned adds to the amount invested. The next time, you calculate the interest on the aggregate amount (i.e., the deposited amount and the added interest).

Thus, the earned interest accumulates under compound interest, and you keep earning interest on the accumulated amount.

What is a Compound Interest Calculator?

Calculating the compound interest on your investments involves a mathematical calculation. This calculation takes time and effort. For instant results, you can use the compound interest calculator.

The compound calculator is an online calculation tool that calculates the total interest earned on your investment through the compound interest method. You have to enter the details of your investment to calculate compound interest online. The calculator works out the interest in absolute terms and gives you the answer within seconds.

How does Compound Interest Work?

In the case of compound interest, you should calculate the first interest on the amount invested. For instance, say you invest ₹10,000, and the interest rate is 8% p.a., compounded annually. In this case, in the first year, you will earn an 8% return on your investment of ₹10,000. It translates to ₹800 in earnings over the year.

In the next instance, when you calculate the compound interest, the interest earned previously gets added to the invested amount. The compound interest is then calculated from the total amount.

So, in the above example, the interest earned of ₹800 is added to ₹10,000, giving an aggregate amount of ₹10,800. In the next year, the interest is calculated at ₹10,800 and not ₹10,000. Thus, you will earn 8% of ₹10,800, i.e. ₹864.

The interest is added to the cumulative amount every time, and the subsequent compound interest is calculated from the aggregate amount.

Compound Interest Formula and Steps to Calculate Compound Interest

The calculation of compound interest is a two-step process. First, you should calculate the amount at the end of the investment tenure. Then, you deduct the amount from the investment amount to get the compound interest.

To calculate the aggregate amount at the end of the tenure, the following mathematical formula is used -

A = P [{1 + (R/N)} ^ (N X T)]

In this compound interest formula, the values are expressed as follows -

A = Amount on maturity

P = Investment amount

R = Rate of interest or interest rate

N = Compounding frequency, i.e., how many times interest is calculated in a year

T = Investment tenure

Once you calculate the amount, you deduct it from the principal invested and get the compound interest. So, the compound interest formula is as follows -

Compound interest = A - P

How to use the Compound Interest Calculator?

To use the compound interest calculator, you will have to provide the following details to calculate compound interest online-

• The amount invested
• The investment tenure
• The rate of interest, actual or estimated
• Compounding frequency

Once you enter the details, hit 'calculate', and the compound calculator will calculate the maturity amount and the compound interest earned on the investment in one go. You would not have to calculate compound interest separately.

Compound Interest Example

To understand how compound interest works and is calculated, here's a little example -

Say, you invest ₹1 lakh in an avenue yielding 8% interest p.a., compounded annually. The investment tenure is 5 years. Here's how to calculate compound interest -

Once we know the amount, we should calculate the compound interest using the next part of the formula, i.e. -

Compound interest = Amount on maturity - Investment amount

= ₹1,46,933 - ₹1,00,000

= ₹46,933

Benefits of Compound Interest Calculator?

There are multiple benefits of using the compound interest calculator. Some of the primary ones are as follows -

Instant Calculation

With the compound interest calculator, you don't have to do complex mathematical calculations. Just enter the investment details and get instant results without calculations. The calculator is, thus, convenient and quick.

Free to Use

Utilising the compound interest rate calculator does not involve any fees. You can use the calculator anytime and even multiple times to check the returns from any investment avenue.

Return Assessment

The compound interest rate calculator gives you accurate returns from an investment avenue. You can check the returns in absolute terms and assess how much your investment will yield over a specified tenure at a given interest rate.

Helps in Financial Planning

Knowing the corpus you can create with an investment avenue, you can plan for your financial goals. By showing the expected maturity amount, the compound interest calculator shows the corpus you can accumulate and helps you plan your savings and investments accordingly.

Helps in Comparison

You can calculate the expected returns from different investment avenues and then compare each avenue based on the returns generated. It helps you choose the most profitable investment avenues to create a suitable corpus for your financial goals.

Conclusion

Knowing the returns from an investment avenue motivates individuals to save and invest for their financial goals. A compound interest calculator helps calculate the returns from your investments effortlessly. So, when investing, use the compound interest calculator and compute the expected maturity amount. You can also use the calculator to check how your investments are performing. Use the calculator free of cost and know your returns.