Compound Interest is Deposit or a Loan that is calculated based on both the initial principal amount and the accumulated interest from the previous period
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Compound interest
Do you know why Compound interest is an exponential growth to your investment over a long period of time? Here is how a simple interest vs Compound interest projects the growth of your investment over a long period time.
Compound Interest Formula with out Recurring Deposits
Where
P = Initial Deposit
r = Annual Interest rate
n = Compound interest deposition frequency
(Monthly = 12, Quarterly = 4, Half yearly = 2, Annually = 1, daily = 365)
t = time period in years
Compound Interest Formula with Recurring Deposits
Where
P = Initial Deposit
Q = Monthly reccuring deposit
r = Annual Interest rate
n = Compound interest deposition frequency
(Monthly = 12, Quarterly = 4, Half yearly = 2, Annually = 1, daily = 365)
t = time period in years
Example of Compound interest calculation
Ms.Vaahini would like to deposit an initial amount of ₹100,000 rupees that matures in 5 years. Each month, she would like to invest ₹1000 for the entire 5 years. The interest rate is 5% annually. She wants to calculate how much she will save in total in those five years if the compound interest deposits monthly.
P = ₹100,000
Q = ₹1000
r = 5% = 0.05
n = 12
t = 5
A = [100000x(1+(0.05/12))^(5×12)] + [(12/12) x (1000)x(((1+(0.05/12))^(5×12))-1)/(0.05/12)]
A = [100000x(1.28335868)] + [(1 x 1000x(68.00608284)]
A = [128335.86] + [68006.08]
A = 196,341.88
Vahini will have ₹196342 at the end of 5 years of tenure.
Check this in the above calculator.
Simple Interest Formula
Simple Interest (I) = P x R x n
Where:
P = Deposited Amount
R = Interest Rate
n = Simple interest deposition frequency
(Monthly = 12, Quarterly = 4, Half yearly = 2, Annually = 1)
Example of Simple Interest Calculation
Ms.Vaahini would like to deposit an amount of ₹100,000 rupees that matures in five months. The interest rate is 5% annually. She wants to calculate how much interest she will earn in those five months.
I = P x R x n
I = ₹100,000 x 5%/year x 5/12 of a year
I = ₹2083
Vaahini earns ₹2083 for the five months.
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