Personal Finance Calculators > Compound Interest Calculator

Compound Interest Calculator

Use this calculator to determine the worth of your investment after some years if you earned a fixed rate of return on it.

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What is compound interest?

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with Rs. 100 principal and 1% interest per month would have a balance of Rs. 101 at the end of the first month.

The effect of compounding depends on the frequency with which interest is compounded and the periodic interest rate which is applied. Therefore, in order to define accurately the amount to be paid under a legal contract with interest, the frequency of compounding (yearly, half-yearly, quarterly, monthly, daily, etc.) and the interest rate must be specified. Since most people prefer to think of rates as a yearly percentage, most financial institutions disclose a (notionally) comparable yearly interest rate on deposits or advances.

Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding).

Some useful terminology

Nominal annual interest rate: This is the annual rate, unadjusted for compounding. For example, 12% annual nominal interest compounded monthly has a periodic (monthly) rate of 1%. Financial institutions will usually quote this rate along with the compounding period, when they offer you a loan or a fixed deposit. Effective annual rate: This is obtained by restating the nominal rate to reflect the effective rate as if annual compounding were applied. This is the real rate of interest you are paying (in the case of a loan), or earning (in the case of a fixed deposit).

Formula for calculating compound interest

Where, P = principal amount (initial investment) r = annual nominal interest rate (as a decimal) n = number of times the interest is compounded per year t = number of years A = amount after time t.
An example: An amount of Rs. 10,000 is deposited in a bank paying an annual interest rate of 6.5%, compounded monthly.
Find the balance after 8 years. Answer. Using the formula above, with P = 10,000, r = 6.5/100 = 0.065, n = 12, and t = 8: So, the balance after 8 years is approximately Rs. 16,797.

Understanding how compound interest works

How does compounding work? When you save Rs.100 and get an annual interest of 10%, you will have Rs.110 at the end of one year. If its a compounding interest rate, then next year you will get a 10% interest on Rs.110, which then makes it Rs.121. The next year, interest will be calculated on Rs.121 at 10%. In time, these savings could grow exponentially. read more

What is 'rest' in a home loan?

To understand how a home loan works one needs to understand what a rest means. A rest is the interval at which the remainder of the loan amount is recalculated as you repay the loan. This is relevant only in the case of a reducing balance loan as opposed to a flat rate interest loan. These regular intervals or Rests can be yearly, monthly or even daily. read more

Understanding how to choose your home loan offer

In the case of a monthly rest, the balance loan amount is recalculated and decreases every month. Hence it is to the advantage of Sanjana to take up a loan offer with the rest that more closely matches the frequency of her loan repayment. So if you are repaying your loan amount on a monthly basis, take up the loan offer that gives you the best rate on a monthly rest. read more

The avalanche effect of compounding interest

You will notice that the more you delay, the more you need to invest, hence it makes sense to consistently set aside about 10% of your monthly income for your retirement fund. This will mean your savings will increase correspondingly with your income, enabling you to grow your funds exponentially. read more