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# Beginners’ Guide To Using The Compound Interest Calculator For The First Time.

Personal Finance Know More 28-12-2022 | 5 mins read

Have you ever heard of getting compounded interest on your interest? Sounds exciting, doesn’t it? When you invest, you earn interest every year. However, in the case of compound interest, you get interest both on the invested sum and on the interest from the previous year. But when you make a long-term investment, it becomes difficult to manually calculate compound interest. For this, you can use an online compound interest calculator. Read on to understand its details and how it works.

## An Overview of Compound Interest.

When you invest a sum in your savings account, you get yearly interest. Every year, you get this interest at the same rate. This is a simple interest that is calculated on the same principal sum that you initially invested.

But think of a scenario where you get an interest on the principal sum as well as on the interest from previous years. Sounds interesting, right? This is compound interest. The term “compound” means when something is combined. In this case, what you are combining is “interest.”

Simply put, compound interest is combined interest. In other words, it is when you get interest on interest. This compound interest is the easiest and fastest way to grow your invested sum. Now you must be wondering how to calculate this compound interest.

## Manual Calculation of Compound Interest.

In the case of compound interest, the principal sum changes every year. The first year’s interest adds up to the principal sum (initial sum) and becomes the principal sum of the second year. This is how the cycle goes on until the end of the tenure.

To better understand this, consider an investment of Rs 1,00,000. The interest rate is 10%, compounded annually. And the tenure for the investment is 3 years.

The table below shows the calculation of

• principal sum (subject to change every year),
• interest earned, and
• The final amount (the principal sum plus interest).

From the above example, you can see an investor earned a total interest of Rs 33,100 on an investment of Rs 1,00,000. This is a basic calculation, but it can run into pages when there is a long-term investment. Here comes the need for a “Compound interest calculator.” An investor just needs to enter input, and the interest calculator will give the desired return on investment at the end of the tenure.

## Understanding Compound Interest Calculator.

Manually calculating the interest leads to inaccuracies. It also eats up a lot of an investor’s time. To solve this problem, we have a financial tool called the “Compound interest calculator.” It helps an investor to calculate compound interest easily and accurately. It is a tool that calculates the total amount an investor will get at the end of the tenure at a specified interest rate. This tool is available online on the websites of lenders or other portals.

## Formula For Compound Interest Calculation.

The basic formula to calculate compound interest is

A = P(1+r/n) ^ nt

• A represents the final amount at the end of the term.
• P represents the principal sum or initial investment.
• r represents the compounding rate of interest.
• n represents the compounding frequency per year.
• t represents the number of years in the tenure.

Let’s now take the same example as the previous one. Say,

P = 1,00,000

r = 10%

n = 1 (Interest compounded yearly)

t = 3 years.

Using an interest calculator, the compound interest at the end of the tenure will be

A = 100000(1+0.10/1)^1*3

A = Rs. 1,33,100

The interest earned over the years is Rs. 33,100.

## How do I use the Compound Interest Calculator?

Before using an interest calculator, an investor must know the following:

• Principal sum (P).
• Interest rates (r)
• The frequency of compounding interest (n).
• Tenure of investment (t).

To use an online compound interest calculator, investors need to provide the following inputs:

1. First, enter or choose the amount you want to invest from the slider. It is the principal amount or initial investment.
2. Next, you must choose the frequency of compounding interest. You can choose among yearly, half-yearly, quarterly, or monthly.
3. Then, choose the period for which you want to keep your money invested. This is the term of your investment.
4. As the last step, choose the expected interest rate.
5. The interest calculator will quickly and accurately arrive at the relevant results.

## Benefits of Using Compound Interest Calculator.

There are many benefits to using a compound interest calculator. Some of those are listed below:

1. The first and foremost benefit is that it is the most reliable tool because it helps an investor decide how much investment he should make over a given time frame.
2. It reduces the manual efforts of investors. because it calculates the compounded value of the principal sum within seconds.
3. It provides complete information on how much interest an investor will get after maturity. With this, the investor can plan his finances better.
4. It helps investors make the right investment decision. The investor will choose the best option among the investment options available.
5. Many interest calculators are available online. They can help you determine the best investment plans according to your needs.

## Bottomline

A compound interest calculator is an easy and convenient tool. It takes a few inputs and calculates the accurate amount. You should use an interest calculator to aid your financial planning. Using an interest calculator, you can make the right investment decision. Visit our website to get the best interest rates and easy repayment tenure on various loans.

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