What is a Compound Interest Calculator?
A compound interest calculator is an online tool that calculates interest earned on investments in a compounded manner and provides the final value of the investment. An online compound interest calculator simplifies the complex calculations of determining the final value of investments compounded periodically.
This tool simplifies the calculation process by instantly determining the compound interest based on user-provided inputs such as the principal amount, interest rate, compounding frequency, and the time the money is invested for. It provides valuable insights into the total amount an investment will grow to over time, helping in financial planning and decision-making. Compound annual growth rate calculators are widely used to plan for savings, investments, and loans to understand the impact of compounding on financial outcomes.
How Does a Compound Interest Calculator Work?
A compound interest calculator computes the final value of the investment by collecting principal, interest rate, compounding frequency and duration. The compound interest calculator works on the compound interest formula to quickly compute the interest earned and total investment value at the end of the investment period.
To get an estimate of the value of your investments in the future, invested at a compounding rate, all you need to do is:
Enter your investment amount
Enter your expected rate of return
Enter the investment period (in years)
Based on the above-entered details, the calculator will display your total investments at the end of your investment tenure – giving you detailed insights on how much you invested, how much the interest earned and the total investment that you get at maturity, by using the following formula:-
Maturity Amount = P x (1+r)t
Where
P - is the principal amount of investment
r - is the rate of interest applied
T - is the tenure for which you wish to invest
How to Calculate Compound Interest?
How to calculate compound interest? - is one of the most searched queries on the internet when it comes to investment returns. To help you get an idea of how compound interest is calculated, here is a simple example
To know how compound interest is calculated, we must understand what compound interest is. In simple terms, compound interest is an interest that you earn over the interest that you get on your principal investment.
There are two types of interests.
First is the simple interest.
In this case, the interest is generated only on the principal amount
For example, let’s assume you invest 10,000 in a savings account at an annual rate of interest of 5% for 5 years. In this case, the simple interest will be calculated using the following formula
Simple Interest = (Principal Amount × Rate of Interest × Time) / 100
Let’s input our data for the above-required values
Simple Interest = (10,000 x 5 x 5) / 100
Simple interest = (2,50,000)/100
Simple Interest = 2,500
In this example, on an investment of Rs 10,000, you earn a simple interest of Rs 2,500
Consider the same scenario, but in this case, the rate of interest (i.e 5%) is compounded annually, which means, every year for 5 years, you will generate interest over the interest you have earned for the previous year
To calculate the compound interest, we need to use the formula
A = Principal Amount × [(1 + (Rate of Interest / 100))^Time - 1]
Here,
A is the final interest amount that you will receive
P is the principal amount of your investment
R is the rate of interest
n is the number of times the interest is compounded in a year
t is the Tenure of your investment
So, by substituting the values, we get
P = 10,000
r = 5% or 0.05
n = 1 (because in our case the interest is compounded only once a year)
t = 5 years
Let’s replace these values in the above formula, we get
A = Principal Amount × [(1 + (Rate of Interest / 100))^Time - 1]
A = 10,000 [(1 + (5/100))5- 1]
A = 10,000 [(1 + (0.05)) 5- 1]
A = 10,000 [(1 + (0.05)) 5- 1]
A = 10,000 [1.2763 - 1]
A = 10,000 x 0.2763
A = 2,763
Investing through simple interest will give you a return of Rs 2,500, but investing through compound interest will give you 2,763, which is 10% more on the same investment at the same rate for the same period.
This is why you should make your investments in compounding schemes, to earn more and beat the inflation.
What are the advantages of using a Compound Interest calculator?
All the online compound interest calculators including Motilal Oswal’s Free compound interest calculator offer unbeatable advantages over manual calculations which include:
- Ease of use- An online compounding growth calculator is extremely easy to use and it requires no special knowledge. You simply need to enter the details of the investment amount, the investment tenure and the expected rate of return. With this information, the online tool will compute the compound interest for you in an instant.
- Accurate and reliable- To plan your investments correctly, you need an accurate idea about how much the money invested today will grow over the intended investment tenure. With a compound interest calculator, you can rest assured that the results are accurate and reliable. The insights from the compound interest calculator can make your financial planning error-free.
- Unlimited usage-There is no restriction on the number of times you can use a compound annual growth rate calculator. The unlimited usage offered by this online tool also comes free of charge, so you can compare various investment options without spending any money. By changing the investment amount and the tenure over different iterations, you can determine the ideal investment plan for your portfolio.
