1. What is a compound interest calculator?

A compound interest calculator is an online financial tool that computes the compound interest you will earn on your investments. To understand this online tool better, you need to first be familiar with what compound interest is all about. Essentially, compound interest is the interest earned on the principal amount invested and the returns earned thereon. In other words, it is interest calculated on the previously earned interest.

The formula for computing compound interest is slightly complicated, and making multiple manual calculations for each investment you plan to make can be cumbersome. An online compound interest calculator simplifies this process by determining the compound interest almost instantly, based on the inputs you provide. You only need to enter the following parameters:

•  The amount of investment you wish to make
•  The expected rate of returns
•  The investment period

Based on these details, the calculator will display the amount you will have at maturity as well as the compound interest (or the profits) earned thereon.

2. How can a compound interest calculator help you?

Calculating compound interest manually can be challenging. A compound interest calculator can make the process easier and more accurate. Check out the many ways in which this online calculator can help you.

You can make use of this online calculator to determine the exact amount of compound interest you will earn from your investment. This will help you plan for short-term, medium-term and long-term financial goals accurately.

With a compound interest calculator, you can also figure out how much you need to invest in order to generate a certain amount at maturity. This makes financial planning more efficient, and it allows you to set goals that are attainable.

Different investment options available today come with different rates of interest and compounding frequencies. To make an informed choice between the various options available, you can use a compound interest calculator to determine the maturity amount in each investment avenue.

3. How to calculate compound interest?

Compound interest is calculated on the principal and the interest amount earned up to the given point in time. For instance, say you invest Rs. 1,00,000 at an annual compound interest rate of 5% for a tenure of 3 years. At the end of the first year, your investment will grow by Rs. 5,000 (Rs. 1 lakh x 5%), to become Rs. 1,05,000.

At the end of the second year, interest will be calculated on this new amount of Rs. 1,05,000 instead of just the original capital alone. As you may have featured out, computing this manually can be tedious. This is why a compound interest calculator can be handy. It uses the following compound interest formula to instantly compute the amount of interest you will earn on your investments by compounding:

Compound interest = P (1 + r/n)nt - P

Where the letters represent the following parameters:

•  P is the principal amount deposited
•  r is the rate of interest
•  n is the frequency or the number times the interest is compounded annually
•  t is the overall tenure of the deposit

4. What are the advantages of using compound interest calculators?

Using a compound interest calculator gives you many benefits. If you are not sure whether or not to make use of this tool, check out the key advantages of a compound interest calculator below.

A compound interest 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 do its job and compute the compound interest for you.

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 calculator can make your financial planning error-free.

There is no restriction on the number of times you can use a compound interest 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.

5. How will a compound interest calculator help me plan my finances?

Compound interest is the secret to creating wealth over time. This is because while simple interest earns you returns on your investment alone, compound interest helps you gain added returns on your existing returns. In other words, it is interest on interest, which helps your corpus grow exponentially rather than just linearly.

To understand how much you can earn from an investment that offers compound interest, you need to use a compound interest calculator. This nifty online tool helps you plan your finances in a more informed and efficient manner, since you can get a clear idea of exactly how much your deposit will grow over the investment tenure.

Conversely, you can also use this online financial tool to compare different investment options that offer the benefit of compounding, and figure out which investment avenue can help you achieve your financial goals in a timely manner.

6. What is the difference between simple interest and compound interest?

Simple interest is the interest that you earn on the principal amount alone. It is computed using the following formula.

Simple interest = (P x R x T) ÷ 100

Here, the following parameters are denoted by the letters:

•  P is the principal amount deposited
•  R is the rate of interest
•  T is the overall tenure of the deposit

On the other hand, compound interest is the interest earned on the principal amount as well as the returns earned up to that period. So, you earn interest on your interest, leading to exponential growth of your capital. Compound interest is calculated using the formula shown below.

Compound interest = P (1 + r/n)nt - P

Here, the following parameters are denoted by the letters:

•  P is the principal amount deposited
•  r is the rate of interest
•  n is the frequency or the number times the interest is compounded annually
•  t is the overall tenure of the deposit

7. When is my interest compounded?

The interest earned on an investment can be compounded on a monthly, quarterly, semi-annual or annual basis. The frequency of compounding varies from one investment to another. So, make sure you check the frequency of compounding before choosing an investment option.

8. Can I include regular withdrawals?

A regular compound interest calculator does not typically have any input fields for regular withdrawals. However, you can make use of a SWP (Systematic Withdrawal Plan) calculator to compute the returns from your investment in case you want to make regular withdrawals.

9. What is the effective annual interest rate?

The effective annual interest rate is the rate of the returns actually earned on your investment when you take compounding into consideration.