Compound Interest Calculator

Our Online Compound Interest Calculator tool can help you calculate the future value of your investment considering compound interest.

What is Compound Interest?

Compound interest is often referred to as “interest on interest.” It’s the interest earned on both the initial principal amount you invest and the accumulated interest from previous periods. Over time, compound interest can significantly grow your investment.

How is Compound Interest Calculated?

Compound interest is calculated using the compound interest formula: A = P(1+r/n)^nt. To calculate the compound interest for annual compounding, you need to multiply the initial balance by one plus your annual interest rate raised to the power of the number of time periods (years). This will give you a combined figure for the principal and the compound interest.

A = P(1+r/n)nt

Where:

• A = the future value of the investment
• P = the principal balance
• r = the annual interest rate (decimal)
• n = number of times interest is compounded per year
• t = the time in years

How to Use Compound Interest Calculator?

1. Initial Investment: Enter the initial amount of money you are investing.
2. Interest Rate: Enter the annual interest rate offered on your investment. Convert the percentage rate into a decimal (e.g., 5% = 0.05).
3. Number of Years: Enter the total number of years you plan to keep your investment.
4. Compounding Frequency: Select how often the interest is compounded (e.g., annually, monthly, quarterly).
5. Calculate: Click the “Calculate” button.

Calculate Compound Interest Example

Example 1: Suppose you invest ₹50,000 in a fixed deposit account with an annual interest rate of 6%, compounded annually, for a period of 3 years.

After the first year, the interest earned would be ₹3,000 (6% of ₹50,000). In the second year, the interest is calculated on the new balance of ₹53,000, resulting in ₹3,180 interest. This process continues each year.

Year 1:
    Initial Balance: ₹50,000
    Interest Earned: ₹50,000 * 6% = ₹3,000
    New Balance: ₹50,000 + ₹3,000 = ₹53,000

Year 2:

    Initial Balance: ₹53,000
    Interest Earned: ₹53,000 * 6% = ₹3,180
    New Balance: ₹53,000 + ₹3,180 = ₹56,180

Year 3:

    Initial Balance: ₹56,180
    Interest Earned: ₹56,180 * 6% = ₹3,370.80 (rounded off to 2 decimal places)
    New Balance: ₹56,180 + ₹3,370.80 = ₹59,550.80

After 3 years, the fixed deposit account would have a balance of ₹59,550.80.

How to Calculate Monthly Compound Interest?

Here’s how to calculate monthly compound interest using our compound interest formula. Monthly compound interest means that our interest is compounded 12 times per year:

1. Divide your annual interest rate (decimal) by 12 and then add one to it.
2. Raise the resulting figure to the power of the number of years multiplied by 12.
3. Multiply your step 2 result by your principal balance (P).
4. Deduct the principal balance from your step 3 result if you want just the interest.

As a formula, it looks like this:

A = P(1 + r/12)^12t

Benefits of Compound Interest

I believe that pictures can be very helpful in aiding our understanding of complex concepts. The power of compound interest is no exception. It becomes much easier to comprehend when you look at a graph of long-term growth.

To illustrate, let’s consider an example graph of an initial investment of $1,000. We will assume a longer investment period of 20 years, with an annual interest rate of 10%, to keep things simple.

By comparing the compound interest line in our graph to those for standard interest and no interest at all, it becomes clear how compound interest can significantly increase the value of an investment over time.

Compounding with Additional Deposits

Combining the power of interest compounding with regular deposits into your savings account, SIP, Roth IRA or 401(k) is an efficient saving strategy that can significantly boost the growth of your money in the long run. For example, if you add an extra Rs. 100 per month into your investment, after 20 years, your balance can reach up to Rs. 67,121, with interest of Rs. 33,121 on total deposits of Rs. 34,000.

Financial institutions always emphasize the importance of starting regular investment contributions early in life. This helps you see significant growth in your savings over time as your interest snowball gets larger and you gain from Dollar-cost or Pound-cost averaging.