Summary
Total Compound Interest
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Compound Interest Calculator
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it. Compound interest is the interest calculated on the initial principal AND the accumulated interest from previous periods.
How does Compounding work?
When you earn interest, that interest is added to your principal. In the next period, you earn interest on both the original principal and the newly added interest. This creates a snowball effect, causing your wealth to grow exponentially over time.
A = P (1 + r/n)^(nt)
Where:
A = Final Amount
P = Principal Amount
r = Annual nominal interest rate (as a decimal)
n = Number of times interest is compounded per year
t = Number of years
Example:
If you invest ₹1,00,000 at 10% per annum for 5 years, compounded annually (n=1):
A = 100000 * (1 + 0.10)^5 = ₹1,61,051
If you used simple interest, the amount would only be ₹1,50,000. Compounding gave you an extra ₹11,051 because your interest was earning interest!
The Power of Compounding Frequency
- The more frequently interest is compounded (e.g., monthly vs yearly), the higher the final amount will be.
- Always check the compounding frequency when evaluating investment options or loan terms.