Compound Interest Calculator

Interest rates and investment returns are closely related. Simple interest, as we know, is interest earned on the principal amount invested. Compound interest kicks in when your interest is reinvested and you get interest on your principal amount along with the accumulated interest. The interest on interest feature makes compound interest attractive but makes it difficult to calculate as the principal amount keeps increasing. Use our compound interest calculator above to learn how much you will earn as compound interest during your investment tenure. 

This blog post aims to simplify compound interest calculations for you. You just need to key in the input variables to calculate the interest amount accrued on your investment. Read on as we analyze the tool in detail.

Compound interest calculator explained

The compound interest calculator is a tool designed to ease compound interest calculations on your investment. All you need to do is plug in the numbers that the calculator field prompts you to enter and the tool will do the job for you. 

Understanding how compound interest calculator works

The CoinSwitch compound interest calculator works on four variables: 

1. The principal or initial investment amount

The principal amount is the sum that you will start your investment with. All your compound interest calculations will be based on your principal amount. 

2. The compounding frequency

The interest you will earn on your investment will depend on the compounding frequency. Some commonly utilized compounding frequencies are annual, semi-annual, quarterly, or monthly. 

3. The rate of interest

This is the rate at which your investment will grow. The annual rate of interest will be mentioned in the investment scheme documents.

4. Investment period 

This variable determines the time frame of your investment. The number of compoundings will depend on the investment tenure. 

Once you input these variables, the compound interest calculator will compute the total amount receivable at the end of the investment period and the total interest you will receive on your principal—all in just a few seconds. 

The formula to calculate compound interest

A reliable and easy way to calculate compound interest is by using the calculator. But in case you want to test your math acumen, you can calculate compound interest using the formula below: 

A=P(1+r/n)nt

Where:

A = Compound Interest

P = Principal Amount

r = Interest Rate

n = Compounding Frequency per year

t = Number of Investment Years

Let’s understand the concept of compounding with the help of an example: 

Ms. B is looking to invest ₹10,000 for 5 years at a 10% rate of interest compounded annually. The calculation will look something like this::

Year 1 = 10,000*10/100

= 1000

The first-year or first-period interest calculator will be the same as simple interest calculations. When calculating the compound interest, the difference in calculation will start from the second year or the second compound period. 

For the second year, the principal amount for Ms. B will be ₹10,000 plus the interest accrued from the previous year. That is ₹11,000. 

Year 2 = ₹11,000*10/100

= ₹1100

Similarly, the principal amount for the third year will be Rs. 12,100.

This is how compound interest is calculated. While these calculations look easy for short periods with few compounding periods, complications set in when the tenure is long with multiple compounding periods in a year. 

A compound interest calculator can help calculate the receivable amount based on the variables fed in the calculator fields. 

How the compound interest calculator can benefit you

Using a compound interest calculator can be beneficial in many ways. Let’s discuss some of them.

• Precise calculations

Money is a serious matter and this makes the accuracy of calculations all the more important. As demonstrated above, calculating compound interest manually is tedious. The complexity of calculations can lead to human errors, defeating the whole purpose.

A compound interest calculator helps you tide over this problem. It not only makes the math super easy, it consistently reduces the chances of errors. That makes it the more reliable option.

• Saves time

Calculating compound interest manually is time-consuming. A compound interest calculator on the other hand can calculate the interest amount as well as the receivable amount within seconds. A well-designed compound interest calculator can help you save time while ensuring reliability and accuracy. 

• Sharpens financial decision-making 

In practical terms, you can use a compound interest calculator like the one above to evaluate investment products such as fixed deposits. It can also help you understand how your investment will grow with time at a given rate of interest and compounding frequency. This can help you closely align your investments with your financial goals. Essentially, the tool gives you the flexibility to do some trial and error before you set out to make your investment.

Conclusion

Small wonder the magic of compounding is one of the classic investment lessons in finance. Compound interest has the potential to make your investment grow by leaps and bounds. What’s more, the compound interest calculator is simple, accurate, and reliable.