What Is a Compound Interest Calculator?
A Compound Interest Calculator helps you estimate how your investment grows over time when interest is added not only to the original amount but also to the previously earned interest.
How Compound Interest Works
Compound interest means earning interest on interest. Each compounding period adds interest to the principal, increasing the base on which future interest is calculated.
Compound Interest Formula Explained
The standard compound interest formula is:
A = P × (1 + r / n)n × t
- P = Principal amount
- r = Annual interest rate
- n = Compounding frequency per year
- t = Time in years
Why Compounding Frequency Matters
The more frequently interest is compounded, the higher the final amount becomes. Monthly compounding generally yields higher returns than yearly compounding.
Practical Uses of a Compound Interest Calculator
- Planning long-term investments
- Estimating mutual fund growth
- Understanding fixed deposit returns
- Comparing savings options
- Financial goal planning
Compound Interest vs Simple Interest
Simple interest is calculated only on the principal amount, while compound interest grows exponentially because interest is reinvested each period.
Examples of Compound Interest
If you invest ₹1,00,000 at an annual interest rate of 8% for 10 years with yearly compounding, the final amount will be significantly higher than the original investment.
Limitations of Compound Interest Calculations
Compound interest calculators assume a fixed rate and consistent compounding. Real-world investments may vary due to market conditions and tax implications.