Compound Interest Calculator

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Interest Visualization

What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often described as "interest on interest," and it makes your money grow faster than simple interest. The more frequently interest is compounded, the faster your balance grows.

How to Calculate Compound Interest

The formula for Compound Interest is:

Amount (A) = P (1 + R/n)^(nt)
Compound Interest (CI) = A - P
Where:
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
R = the annual interest rate (as a decimal, e.g., 5% = 0.05)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for

Example

Suppose you invest ₹10,000 at an annual interest rate of 5% compounded annually for 5 years. Here's how to calculate compound interest:

A = ₹10,000 (1 + 0.05/1)^(1*5) = ₹12,762.82
Compound Interest (CI) = ₹12,762.82 - ₹10,000 = ₹2,762.82

After 5 years, the total amount will be approximately ₹12,762.82, with a compound interest of ₹2,762.82 earned.

Compound Interest FAQs

Compound interest is more beneficial over the long term because it calculates interest not only on the initial principal but also on the accumulated interest from previous periods. This "interest on interest" effect leads to exponential growth, making your investment grow significantly faster over time compared to simple interest, which only earns interest on the principal.

The more frequently interest is compounded, the greater the total interest earned over time. For example, interest compounded monthly will yield a higher return than interest compounded annually, given the same principal amount, interest rate, and time period. This is because with more frequent compounding, interest is added to the principal more often, thereby earning interest on interest more frequently.

For investors and savers, compound interest is generally very good as it helps grow wealth faster. However, for borrowers, compound interest can mean accumulating debt faster, especially if not managed carefully. The benefits or downsides largely depend on whether you are earning or paying interest. Understanding compound interest is crucial for both investment and borrowing decisions.