In this Article, Let’s learn about compound interest and compound interest formula!
What is Compound Interest?
In simple terms, when the interest is added to the principal amount of an investment deposit or loan, it is called compound interest. It is called a compound interest because the accumulated interest is added to the principal amount.
Later the interest for the upcoming period is calculated on the new amount. This principle amount is added to the amount of accumulated interest over a period. This is the procedure that is repeated through the Investments tenure period. So the interest is calculated by compounding the principal amount and the interest that is generated before.
The main power of compounding is the fact that it increases the investment amount each year by factoring in the interest amount that is generated the previous year. Thus, it gives a definite edge over any other kind of investment.
What is the concept of Compounding?
In layman terms, compounding is a procedure that takes place when your earnings grow exponentially as you get interested in your investment within a period. There are endless possibilities when it comes to compounding. This is because the investment gets the capability to earn by itself.
Compound interest is a great way to enhance or boost your earnings as time passes. It just doesn’t stop here. Compound interest allows your investments to grow exponentially well. Latest learn more about what is compound interest and what are the benefits of the same. At the same time, we will learn the use of a compound interest calculator as well.
How Do You Calculate CI ? Compound Interest Formula
Here is the compound interest formula:
A = P (1 + r/n) ^ nt
In this formula, P stands for the principal amount, r stands for the rate of interest per annum and n indicates the no. of times that the interest gets compounded in a year. Finally, t denotes the total number of years.
Now let us understand compound interest formula better with an example.
Rohit invested ₹50, 000. It offers an annual interest of 10% for a period of five years. The interest for the initial year with compound interest will be 50,000 x 10/100 that will give you ₹5000. Similarly, the interest for Rohit’s second year will be formulated in the same manner. It will be calculated on the accumulated amount which is 50,000 + 5000= 55,000
Here, the interest for the 3rd year will be calculated in this manner:
50,000 + 5,000+ 5, 550 = 60,550 x 10/100 = ₹6055
Similarly, following the same calculation, the interest for the fourth year for Rohit’s initial investment will be calculated in this manner:
50,000 + 5, 000 + 5, 500 + 6055= ₹66, 605 x 10/100= 6,660.5
Moving on to the 5th year, the final interest will be calculated in the following manner: 50,000 + 5,000 + 5,550 + 6055 + 6,660.5 = ₹73265.5 x 10/100 = ₹ 7,326.55
Now you know the power of compounding and compound interest formula. With this Rohit has earned a substantial amount of interest which is 5,000 + 5,550 + 6055 + 6,660 + 7,326.55= ₹ 30,591.55
Thus, Rohit’s total investment after a period of 5 years is ₹50, 000 + ₹30, 591.55 = ₹80,591.55.
What Should You Know About CI and Compound Interest Formula?
• If you need to know how much your investments will give you, then you can always have a look at the compound interest calculator that will give you an accurate figure.
• A majority of the compound interest formula calculator is customizable which means that you can enter your inputs easily. This way you can choose the amount of investment and the rate of interest as per your choice. At the same time, you can even consider changing it as per your requirement.
• Compound interest has a huge potential. It allows you to multiply your income. For instance, if you make an investment that gives you a compound interest of 6% per year, it has the power to multiply enormously within 12 years. At the same time, if you wish to wish to grow it, even more, you can consider keeping it for 24 years. This will grow your money fourfold.
• The best thing about compounding is that you don’t need to be an expert at it. That being said you don’t need to be a financial analyst to be great at compounding. All you need to do is invest smartly and make small sacrifices for better gains in the long run. Make it a habit to deposit money in your account which will eventually add up.
The Bottom Line
Now that you know that compound interest formula, you can calculate and analyze the number of returns on the investments that you make. Today, there are a variety of compound interest formula and calculators that will help you easily get accurate results without any hassle.
Have discussed previously the power of compounding is imaginable. The returns on the investments are exponentially higher in compound interest as compared to simple interest. which you can analyze using compound interest formula.
However, there are a few basic things that you need to follow to actually get the returns on the same. A great tip is to start early and set aside money each month. If you are looking for long term investment, compounding is the best choice for your money.
So, we are finally at the end of the article. If you enjoyed reading it, please make sure to share it with your family and friends. Also if you have any suggestions or feedback, don’t hesitate to get in touch with us.
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