Compound Interest Calculator

An online compound interest calculator uses the compound interest formula to calculate the total interest. The formula has three variables:

• Principal (P)
• Rate (R)
• Compounding Frequency (N)

Here, N represents the total number of times that compounding occurs over a given time period. For instance, if you’ve made an investment for 10 years and the compounding frequency is half-yearly, N will be 20 (i.e., 10 years x 2 times/year).

The N is important because the compounding frequency may differ from one investment to another. An online compound interest calculator will give you the option to choose from a monthly, quarterly, yearly, etc. compounding frequency so you can choose the frequency appropriate for your case. When you input the required number in the compound interest calculator, the algorithm will do the math for you and display the total interest you’ll earn over the investment’s holding period.

The compound interest formula is simple and involves three variables. The P in the compound interest formula stands for the principal amount of the investment, and R stands for the interest rate. The N in the formula stands for the total number of times the interest is compounded. Therefore, the compound interest formula is:

Where:
P = Principal amount
R = Rate of interest
n = Compounding frequency per year
N = Total compounding frequency for the entire period calculated as (n x T); n being the compounding frequency per annum and T being the time period in a number of years.

Now that you know the compound interest formula let’s use it to calculate compound interest. Say you’ve invested ₹5,00,000 in a Fixed Deposit that compounds interest quarterly. The Fixed Deposit offers a 5% p.a. rate of return, and you keep the amount invested for 5 years.

Let’s identify the values of the variables we need and then plug those values into the compound interest formula.

• Principal (P) = ₹5,00,000
• Rate of interest (R) = 0.05 (or 5%)
• Compounding frequency per annum (n) = 4
• Total compounding frequency (N) = 20 (i.e., 5 years x 4 times/year)

Therefore, total compound interest earned:

As time passes, the effects of compounding start to become more pronounced. The returns or interest generated over prior periods get added to the principal increasing the principal amount, and therefore the interest thereafter is earned on a higher principal.

As the value of the exponent (n x T) in the formula increases, the interest compounds with greater speed. The compounding frequency (n) remains unchanged; what changes is the time (T) and consequently the total compounding frequency (N).

As a rule of thumb, the more time you allow the principal to grow, the bigger will be your accumulation on which you’ll earn interest. For instance, look at the previous example. We divided 5% by 4 because the interest compounds 4 times each year, effectively compounding 20 times in 5 years. Though the actual investment period is 5 years and the rate is 5%, the formula takes the time as 20 and the rate as 1.25% (5% ÷ 4).

This effectively increases your yearly interest rate. Say you receive compound interest at 1.25% per quarter on ₹100 instead of 5% per annum. At the end of the year, you’ll have ₹105.0945 (instead of ₹105 had you earned 5% per annum). The impact, of course, is much more pronounced on larger figures and longer investment horizons, where the power of compounding becomes more apparent.

For instance, say you’ve invested ₹1 lakh in a fixed deposit that generates 10% per annum, and compounds quarterly. Since the interest compounds quarterly, the effective interest rate is slightly higher at 10.381%.

Here’s what the effective rate generated will look like over the years, when we compare annual compounding to quarterly compounding-

The power of compounding has been said to be phenomenal by the likes of Warren Buffet. What’s important though, is to realise that the power of compounding works in your favour when you earn compound interest, but not when you’re the one paying it. To that point, you can leverage the power of compounding by investing in a range of assets, including mutual funds, fixed deposits, or even PPF.

For instance, consider an equity mutual fund investment worth ₹1,00,000 per annum. Assuming it returns 10% p.a., your investment will grow to the following amounts over different periods:

Over 20 years, your value of investment will more than triple vis a vis the invested amount — and that’s the power of compounding.

ET Money’s compound interest calculator is fairly easy to use. You need to enter three inputs to get your total interest amount — the principal invested, the rate of interest earned, and the holding period of the investment.

Once you’ve entered all three variables in the calculator, it will automatically calculate the total gains and total corpus that you’ll accumulate by the end of the tenure. If you have a target corpus that you’re aiming for, you can tweak the rate of interest or the principal to see its impact on the maturity value.

• ET Money’s compound interest calculator helps you calculate the compound interest you’ll earn on your investment with a single click.
• ET Money compound interest calculator can help you assess how compound interest can grow your money faster than simple interest.
• The ET Money compound interest calculator enables you to calculate the interest taking into consideration the invested amount and the interest earned on it , while the simple interest calculator simply calculates interest on the invested amount.

The conceptual difference between simple interest and compound interest lies in the amount on which the interest is earned. However, there are several other differences between them.