A compound interest calculator calculates the value of the investment over a specific period when your interest is compounded. Compound interest in one line is Interest on Interest. In basics, a compound is something made up of 2 or more elements. On the same line, Compound Interest is calculated on the principal and accumulated interest.
So, before we talk more about the compound interest calculator, let’s discuss what compound interest is, with an example.
What is Compound Interest with an example?
Let’s understand with an example comparing simple interest and compound interest. Aman, a finance graduate, invested ₹100 with an interest rate of 10% for 3 years
Calculation with Simple Interest
| Year | Principal | Interest @10% | Amount at year-end |
| 1 | 100 | 10 (10% of 100) | 110 |
| 2 | 100 | 10 (10% of 100) | 120 |
| 3 | 100 | 10 (10% of 100) | 130 |
Calculation with Compound Interest
| Year | Principal | Interest @10% | Amount at year end |
| 1 | 100 | 10 (10% of 100) | 110 |
| 2 | 110 | 11 (10% of 110) | 121 |
| 3 | 121 | 12.1 (10% of 100) | 132.1 |
If you look closely, you will find that, in compound interest, your interest gets added to the principal, and you get interest on the new principal amount, which is the previously invested amount plus accumulated interest.
What is a Compound Interest Calculator?
A compound interest calculator is an online tool that allows you to calculate compound interest easily. It has a simple interface where you need to fill in the required details such as investment amount, time, interest rate, and compounding frequency. Once completed, the calculator shows you the compound interest and the final amount.
The formula used in Compound interest calculator
A = P(1 + r/100) ^ nt
Where,
A = the amount of money accumulated after n years, including interest.
P = the principal amount (the initial amount of money).
r = annual interest rate (decimal).
n = number of times interest is compounded per year.
t = number of years the money is invested or borrowed for.
Let's take an example, Aman invested 5 lakhs for 1 year at 6% per annum.
P = ₹5,00,000
r = 6% or 0.06
n = 1
t = 10
A = 500000 *[ (1 + .06) ^10 ]
A = ₹8,95,424
This is the same formula you would have read in your school time. But to save you from all this manual calculation, we have incorporated this formula and made a compound interest rate calculator out of it. Now let’s learn how to properly use the calculator.
How to use compound interest rate calculator?
The Indian compound interest calculator requires the following inputs:
- Principal amount: The total amount of money invested initially. For example, ₹5,00,000
- Rate of interest: The interest rate on the principal amount. For example, 6%
- Time (years): Number of years the principal will compound. For example, 10 years
- Compound interest frequency: interest is compounded monthly, quarterly, or annually. For annually it should be 1, 4 for quarterly, and 12 for monthly.
Based on the given inputs, the compound interest calculator will show you:
- Total interest: Interest incurred during the period of investment
- Final value of investment: The final value of the investment, including principal amount and the interest accrued.
Benefits of the Compound Interest calculator
- Accurate calculation: It accurately calculates how much your investment will grow over time based on the amount invested, time, and fixed interest rate.
- Compare different investment options: You can compare the return on various investment options over time and then make an informed financial decision.
- Time-Saving: Calculating compound returns with the interest rate calculator is much faster and easier than manual methods
Conclusion
A compound interest calculator is an easy-to-use tool to calculate the value of your investment over time based on the interest rate. As compared to manual calculations, compound interest calculators provide accurate calculations in a fraction of the time. It can serve as a very useful tool when comparing various investment options.