Compound interest
Compound interest calculators: Tools for visualizing long-term financial goals
The power of compounding can do wonders for one’s saving goals. Several investors have benefitted from compounding over the years. A compound interest calculator can help you calculate the same benefit for free. Read on to know more about this tools and its advantages.
What is compound interest?
Compound interest is defined as the interest earned on the principal amount and accumulated interest. Simple interest, on the other hand, is the amount paid to the borrower for borrowing money for a specific period.
Differences between simple and compound interest:
The following table represents all the key differences between simple and compound interest:
|
Parameters |
Simple Interest |
Compound Interest |
|
Formula |
Simple interest = P * I * N |
Compound interest = P (1 + r/n)^(n*t) |
|
Interest on |
the principal amount |
Principal amount and the interest accumulated |
|
Growth |
Steady |
Exponential |
|
Returns |
Relatively lower |
Greater |
|
Principal amount |
Is the same with regard to tenure |
The principal amount grows as compound interest is added to the principal. |
How do compound interest calculators help you as an investor plan your investments?
Compound interest calculator helps you as an investor know the value of your mutual fund returns at the end of a specified investment horizon. They calculate the value of an investment after a fixed number of months/years, and take three inputs – the principal amount, the rate of interest, and the number of years. Compound interest calculators use the following formula to calculate compound interest:
A = P (1 + r/n) ^(nt)
where A is the final amount, P the principal amount, r is the annual interest rate, n is the number of times the interest is compounded, and t is the number of years.
Benefits of using a compound interest calculator:
Here are the benefits of using a compound interest calculator before investing:
- You can accurately calculate your returns at the end of an investment horizon: A power of compounding calculator can help you calculate the precise value of your returns at the end of a specified investment horizon. These calculators account for inflation while calculating results, thereby giving you a realistic calculation.
- Compound interest calculators are free, and they offer quick results: A very important advantage of using compound interest calculators is that these online tools are completely free to use. You can find them on the website of major banks and mutual fund houses. Additionally, you can save a lot of time by using these tools as they offer quick results.
- You can use the calculator to find your ideal investment amount and horizon: You can input different values of investment amount and horizon to find the ideal investment amount and horizon for your mutual fund investment. Fixing a clear investment objective can help you achieve clarity on these two aspects.
- Compound interest calculators also help you visualise your returns: Compound interest calculators help you visualise the size of your returns through pie charts, bar plots, and other visual aids. This can help you achieve greater clarity about your investment decisions and change them if required.
You can use a compound interest calculator to plan your investments in advance and decide on the right investment amount and horizon for your investment.
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