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Power of Compounding - Compound Interest Calculator
A compound interest calculator can help you calculate how much wealth you can generate if you invest a specific amount of money for some time with the help of compounding interest.
Compounding interest enables you to have passive earnings on your investment, hence the term ‘Power of Compounding’. Mostly, banks and other financial institutions credit compound interest. Savings and investment plans like bank FDs and ULIPs offer a compounding Rate of Interest.
What is the Power of Compounding?
The power of compounding is essentially an act of 'adding interest on interest. Your initial investment will generate earnings from the initial principal sum of money and the accumulated earnings from previous compounding periods. It enables you to grow your wealth exponentially.
The compounding interest calculator simplifies the overall compound interest calculation process. Thus, you can use these calculators to estimate the interest on your investments.
You can use the following formula to estimate the future value (FV) of an investment based on the compound interest concept:
FV = PV x (1 + i)n
- FV = Future value
- PV = Present value
- i = Periodical interest rate
- n = Number of periods
(This is the power of compounding, which determines the growth)
It considers the current value of the asset, the annual interest rate, and the frequency of compounding (i.e., the number of compounding periods) per year, and the total number of years.
How does Compound Interest Work?
The power of compounding is the principal action of reinvesting your earnings from an investment in the same instrument. So, while investing, it pays to stay invested and not withdraw your savings for a long time. But when you borrow money, you must repay your loan regularly.
Compounding interest on saved money grows your wealth. This is why experts recommend starting a SIP the moment you take a loan such as a home loan. By the time you repay it, you will have a house and a large sum of money at your disposal.
If you borrowed Rs 20 lakhs at 10% p.a. your EMI would be Rs 19,300, and you will end up repaying about Rs 47 lakhs in total. Out of which Rs 26 lakhs is the interest. But if you also invest about Rs 6,138 with your EMIs, you will invest only about Rs 15 lakhs and receive an interest of Rs 32 lakhs.
|Loan/ Goal amount (Rs)
|Rate of Return
|EMI / SIP
|Total Outflow/ investment
For a total outflow of Rs 25,500, you not only recover your outgoing wealth but also have an asset.
How to use Compound Interest Calculator?
You can easily calculate compounding interest online using the free calculator. The compound interest calculator is easy to use. Provide the inputs and get the answer within a fraction of a second.
The compounding interest calculator requires the following inputs from you to give you a picture of the growth and future value of the investment:
Step 1 - Amount you Wish to Invest and the Frequency
The money you want to invest is also called the invested amount. You also need to select the frequency of your investments.
Step 2 - How Long do you Want to Continue Investing?
When you invest a small sum regularly, you need to invest for a few years to have a substantial corpus. Decide the number of years you will continue to invest.
Step 3 - How Long will you Stay Invested?
It is the time in which you will stay invested. This period could be equal to or more than the number of years you will continue investing.
Step 4 - What is the Rate of Interest?
It is the yearly rate of return your investment will earn throughout the investment period. The rate of return as well, cannot change within the selected investment period.
Step 5 - Enter your Details and Submit
After selecting your inputs, fill in your name and contact details and click on submit to estimate the results.
How Power of Compounding Helps you Grow your Wealth?
Consider that you and your closest competitor are involved in the same trade. Both of you started at the same time with the same amount of money.
However, you can clear your stock within five days, while your competitor takes seven. If you made Rs 10,000 on every stock-out, you would’ve made Rs 60,000 in a month, while your friend will take about two months to make the same money.
This is how compounding works. If you increase the frequency of compounding, you can expect higher growth for your money. For example, a bank FD, which pays 8% p.a. quarterly compounded interest is going to grow your money faster than a bond fund paying 8% p.a. interest compounded annually.
Thus, if you want to invest for a comfortable retirement or a large financial goal, start early.
With more compounding for interest, your investments can grow better over a longer period.
Benefits of Using a Compound Interest Calculator
A compounding interest calculator can simplify your investment calculations. The calculator helps you understand the effect of investment period and interest rates on your invested money.
The simple online calculator offers many other benefits as listed below:
Calculations Made Easy
The power of compounding calculator is simple to use. You can select the values for different parameters, and the calculator will do the rest for you.
Helps Plan your Money & Future
It helps if you know how much money you will need and when. Or have answers to the questions like, if I invest this much at this rate how much money I will have in a few years. If you are planning to invest in a savings plan, you must know how much money you will be getting at the end of the policy term.
Compare Different Investment Options
You can use the rate of return and other parameters from the investments you are considering and estimate the future values of your investment.
Create and Draw Conclusions from Scenarios
The power of compounding calculator is a very flexible and easy tool to work with. Thus, creating multiple investment scenarios and giving wings to your imagination is not a difficult task.
Increase your Savings
The power of compounding calculator can motivate you to save and invest more. When you see how a small amount of money invested for the right amount of time can turn into a huge sum, you are unlikely to ignore the temptation to save more.
Completely Free of Cost
The best part of the calculator is, perhaps, the cost of using it. It virtually nothing, even time is a nominal investment when you are using it, as the calculations take only a fraction of a second to complete.
How to Improve your Savings with the Power of Compounding?
The power of compounding is responsible for growing tiny investments into substantial corpus over time. Those who understand it and how it works know how money makes more money.
Combine compounding interest with regular savings and you will see your financial journey following an upward trajectory. The exponential growth offered by this has the potential to set you free from the need to work for money.
Start Investing Early
Starting early is the foundation for growth. Early investment will give you a higher growth benefit. The power of compounding works better as your investment period increases. Since the timeline for your financial goals is static, investing early is the only way to increase the effect of compounding.
The earlier you invest, the more time you will have to grow your money.
Control your Expenses
You may be wondering, is investing a small amount valuable enough? Of course, it is.
First, your small investment made a few years back can beat the bigger investments made later.
Second, if you can manage your expenses well, you can increase this small amount. Thus, after early investment, spending control becomes important.
One way to achieve this is by budgeting. You can control, limit or postpone unimportant expenses. Remember, that every penny saved now, will become a source of future income.
Saving money is not enough. Your journey to compounding interest will start once you invest. Your choice of investment will depend on three factors:
- Investment amount
- Investment tenure
- Risk appetite
While you take care of these three, another aspect that matters is tax. However, all you need to do is to use a tax-saving investment wherever possible. One warning sign you must be mindful of is going for higher returns. Remember, while you can manage risk to some extent, returns are always unpredictable.
Compounding relies on the idea of reinvesting. Thus, for maximum benefit, the interest should be reinvested. It is possible if you do not withdraw anything from the investment pool.
Your income is regular, and so should be your investments. Regular, and disciplined investments provide you with an edge with compounding interests.
- Invest regularly even if a small amount
- Invest for a long period
- Leave your investments untouched till maturity
Such discipline will help you maximise your benefits from the power of compounding.
Key Rules of Investment in Power of Compounding
Start Investing Today
Time is important in the growth of an investment. The more time you give to your investment, the higher the growth you get. For example, 20 years from now Rs. 100 invested today will be Rs 673 and Rs. 200 invested 10 years later will be Rs 519 at 10% p.a.
Learn the - best ways to invest money.
Habit of Investing
Investing is a habit you need to develop. Rs. 100 p.m. would go a long way in building wealth than Rs. 1000 invested once in a few years. Also, habits develop over time. So, if you are not saving, you will develop a habit of spending and vice versa.
Time is Important
Time is the biggest influencer of compounding growth in investments. So, unless it’s an emergency, you should let the investments grow without making any withdrawals.
Pay attention to the compounding intervals (compounded quarterly or annually), especially if you are a safe investor. More frequent compounding is often better than lower frequencies.
||With Annual Compounding
||With Quarterly Compounding
|Growth of Rs 100 in 7 years at a 7.5% p.a. rate of interest
Keep Up the Investments
Your income defines your lifestyle and financial goals. So, it is only reasonable that your investments keep up with the growth in your income. Make sure to register the increased income with investments as well, i.e., if your income grew by 10%, so should your regular investments.
How does Compounding Benefit Long-term Investors?
Time is even more important than the amount of your investment. Even if you start small, staying invested will put you ahead of short-term investors.
Consider the following example, where two friends who have an identical financial situation but end up with completely different financial results:
- Ram starts investing Rs. 5000 p.m. at the age of 30 and continues till the age of 60.
- Shyam starts investing at the of 46 but invests Rs. 10,000 p.m. He continues to invest till the age of 60.
If both will earn a rate of interest of 8% p.a., who do you think should have more money at the age of 60?
Understand the difference between short-term and long-term investment.
How to Use Power of Compounding in ULIP?
ULIP offer multiple ways to use the power of compounding on your investment:
You can invest monthly, quarterly or annually in ULIP. The best way to invest is to match the investment frequency with your income and use auto-debit.
Invest for Longer Time
ULIP allow long-term investing. The investment tenure in ULIP can range from 5 years to 99 years of age.
ULIPs like Canara HSBC Life Insurance Invest 4G offer bonus additions to long-term investors. These bonuses add to the compounded growth of your portfolio.
Automated Portfolio Management
When you invest in equity market funds, managing your risk is important for generating returns. ULIP allow you to manage your risk even when not active. Portfolio management strategies in ULIPs will automatically manage your risky portfolio as per market performance.
Compound Interest Calculator FAQs
Compound interest is the interest earned on interest itself. Compound interest refers to the interest calculated on the principal amount and the interest accumulated over the period of time. Interest that you earn on your principal is added to the original amount and for the next cycle it becomes the principal.
For example, if you have ₹ 10000 and it earns 5% interest every year then you will have ₹ 10,500 Rs at the end of the first year. You’ll have 11,025 at the end of the second
You can use a simple formula to calculate compound interest. Please find below how can you calculate compound interest and the
Compound Interest = Amount – Principal
Amount is calculated as,
A = P (1 + r/n/)nt
Compound interest is calculated as,
Compound Interest = P [(1 + i) n – 1]
A = new principal amount after compounding period
P = principal
R = Annual interest rate
n = Compounding frequency
i = Interest rate
n = Number of compounding periods.
If you make an investment of ₹ 1,00,000 at a 10% rate of interest for 5 years, the final compounded amount will be ₹ 1,61,051. See the table below to understand how an investment of ₹ 1,00,000 has grown in 5 years.
A compound interest calculator is a tool that helps you calculate the wealth you can generate over a period of time using interest compounding. It can be used to estimate the returns on investment that offer compounding returns such as ULIP policy. Compound interest calculator uses three factors to calculate compound interest i.e., the principal amount, rate of return and duration.
Power of compounding refers to the number of times the interest earned on an investment is reinvested at the same rate of return. It is the factor that determines the number of times the interest multiplies in the investment.
In a philosophical sense, the power of compounding also means the quality of compounding returns to provide exponential growth to your investments.
Purchasing power determines the value of any amount of money at a given time. For example, you can buy 5 grams of 24 karat gold for Rs. 25,000 now, but in five years you will only get about 4.5 grams. That is because of the rise in the gold price.
The general rise in the price of daily use commodities is called inflation. This inflation causes the value of money to decline gradually. Usually, the rate of inflation is indicated as an annual percentage. For example, the inflation rate in India for the year 2020 was 6.2%.
Meaning the purchasing power of Rs 100 you had in your pocket at the beginning of the year diminished by Rs 6.2 by the end of the year.
So, if the average annual inflation rate is 5% p.a. Rs. 25,000 will be worth Rs. 9422 in 20 years.
When you invest money, your money grows by the rate of return provided by the investment instruments. For example, when you invest in a bank FD, you receive the interest as provided by the FD for the selected tenure. Say, a 5-year FD offers a 7.5% p.a. quarterly compounded rate of interest on deposits.
Thus, the power of compounding in this FD will be 5, for the annual return and 4 within a year due to quarterly reinvested returns.
In total, the power of compounding will be 20, i.e., invested money will with compounded 20 times in five years.
Compounding power reflects the reinvestment of interest. Thus, you can use the power of compounding to estimate the interest factor for the investment period. For example, the rate of return on an investment is 7% p.a. If you invest money in this investment option for 10 years, your interest factor would be “1.07^(10)” or 1.967.
This means every Re 1 invested in this option will grow to Rs 1.967 in 10 years.
Simply invest the money in instruments that offer a rate of return higher than inflation to meet your investment goals. This will ensure the real growth of your wealth in terms of purchasing power. Meaning your wealth will enable you to buy more assets in the future.
Once your invested money is generating annual returns which are higher than your cost of living in absolute terms, you have a unique situation where your wealth starts to compound. For example, if your investments generate Rs. 10 lakhs in a year while you only spend Rs. 5 lakhs, the remaining Rs 5 lakhs will be reinvested.
The reinvested money will increase your return on investment for the next year, officially increasing your wealth without additional investment from you.
If you look at running business stocks will compound only when earnings are declared and a part of it is reinvested in the company’s growth. Which may happen quarterly or annually. So far companies review their books and estimate earnings only quarterly, thus the stocks can be said to compound quarterly.
Compound interest has no disadvantages except in the following two scenarios:
- Difficult to calculate without calculators
- When interest rate is negative, such as inflation rate
In the first case, the estimation of the change at a compounded rate is difficult for manual calculation, because you will need to use complex estimates.
In the case of a negative interest rate, you end up losing money after investment, and since the rate is compounded, the loss is exponential.
Anytime, compound interest means that even your interest starts earning interest after a period. Simple interest on the other hand only accumulates interest but the underlying investment remains the same.
Thus, no matter how long you stay invested, your return on investment will remain the same at a simple rate of interest. However, with compounded interest, your return in the next period will be higher than the previous ones.
Compound interest is considered a powerful concept because you only need to initiate your investment and the rest happens automatically. Imagine your business running itself without your intervention and even start growing itself.
Compound interest can ensure that after crossing a threshold your wealth continues to grow even without additional investment from you. Financial planners call this the stage of financial freedom.
Your money starts generating money for you at this stage. So, you do not really need to work for money anymore.
The most benefit goes to the investors. However, almost every link in the value chain benefits from compound interest. For example, understand that compounding occurs when business income is reinvested into the business for growth.
Thus, compounding helps the business expand its footprint, serve more customers, employ more workers, and grow the value of investors’ money.
Different investment instruments compound the earnings with different timelines. Similarly, these investments will have a different impact on the growth of your investments due to the power of compounding. The most common ways of compounding the interest are as given below:
- Annually Compounded Return: Interest is calculated only once a year and reinvested
- Half-yearly Compounding: Interest is calculated twice a year
- Quarterly Compounding: Interest is calculated every three months
- Monthly Compounding: Interest reinvested at the end of every month
Other hypothetical compounding scenarios, like the ones given below, can also be presented:
- Daily compounding
- Exponential compounding
You can use the compound interest calculator to estimate the impact of different modes of compounding on your investment.
More compounding means more power of compounding and yields higher effective returns. The more frequent is the compounding, the higher is the effective return from compounded interest
Hence, if you have to calculate compound interest daily compounding will yield better growth than monthly compounding.
Simple interest means the interest calculated on the total principal amount. Whereas compound interest also includes the previously accrued interest on the principal amount and accumulated interest.
Compounding interest is the interest on interest. Thus, if you are to calculate compounding interest you may need to use a compounding calculator for accurate results.
Compounding interest means the interest on interest and offers multiple benefits over simple interest. Here are the key advantages of compounding interest:
- Grows your wealth exponentially
- Helps you earn a passive income
- Benefits long-term investors more
- Helps your savings stay ahead of inflation
You will need a compounding interest calculator to estimate the future value of an investment with compounding interest.
A compounding calculator will clearly show you that investing the same amount of money at a similar rate will yield higher returns as compounding frequency increases
Daily compounding could be the highest frequency of reinvestment you can achieve with manual intervention.
Daily compounding is when the interest on the investment is calculated every day and reinvested for the next.
When the interest on the investment is calculated at the end of a month and reinvested for the next month.
When the interest on the investment is calculated year on year. Each year the interest of the previous year will be invested for the next.
Terms & Conditions
This calculation is generated on the basis of the information provided and is for assistance only. And is not intended to be and must not alone be taken as the basis for an investment decisionThe calculations mentioned above take into consideration an assumed rate of inflation of 8%. #The current costs of education mentioned above are approximate values. The end value displayed is on the basis of the information provided and is for assistance only. It is not intended to be and must not alone be taken as the basis for an investment decision. *A 30 years old healthy male can start the plan with a premium payment of Rs. 4000 per month with a policy term of 15 years. The total assumed benefit @ 8% would be Rs 11.43 Lakhs and at an assumed rate of return of 4% p.a., the total benefits would be Rs 8.33 Lakhs. Values are illustrative and actual benefit may depend on number of factors, including future investment performance. Advt No. W/II/1187/2015-16.This calculation is generated on the basis of the information provided and is for assistance only. And is not intended to be and must not alone be taken as the basis for an investment decisionThe calculations mentioned above take into consideration an assumed rate of inflation of 8%. #The current costs of education mentioned above are approximate values. The end value displayed is on the basis of the information provided and is for assistance only. It is not intended to be and must not alone be taken as the basis for an investment decision. *A 30 years old healthy male can start the plan with a premium payment of Rs. 4000 per month with a policy term of 15 years. The total assumed benefit @ 8% would be Rs 11.43 Lakhs and at an assumed rate of return of 4% p.a., the total benefits would be Rs 8.33 Lakhs. Values are illustrative and actual benefit may depend on number of factors, including future investment performance. Advt No. W/II/1187/2015-16.