Compound Interest Calculator – Calculate Your Investment Growth Easily

Compound Interest Calculator









What is Compound Interest (CI)

Compound interest is another type of interest and although it is not as easy to understand as simple interest, it is the most powerful part of the financial system, which is often called the eighth wonder of the world because it is the basis of personal finance, investment and banking system. It is also more beneficial than simple interest and can also be harmful if you do not know how to use it correctly. 

Compound interest is not just based on the principal like simple interest, but it also charges interest on the interest along with the principal, that is, this interest is the interest which is not only charged on the principal but it also charges or pays interest on the interest received from the principal, that is, in this the money itself earns money and with time this process becomes a feedback loop which increases the money rapidly. Let us understand this with an example. 

How Compounding Works (A 3-Year Example)

Suppose you have invested an amount of $10000 at 5% annual interest rate for 3 years and interest is being added once a year, then 3 How much money will you earn in total after 3 years? So here in the first year you got $500 interest on the amount of $10000 at 5% annual interest rate. Now in the second year your principal amount has increased from $10000 to $10500. 

Now in the second year you got $525 interest at 5% annual interest rate. Now in the third year your principal amount has increased from $10500 to $11025. And now in the third year you got $551.25 interest at 5% annual interest rate and you got a total amount of $11576.25. So here we can clearly see that the interest is added to the principal amount once a year. 

If we do this example in the simple interest method, then on the principal amount of $10000 you get the same interest of $500 for all three years at 5% annual interest rate which is a total interest of $1500 and you get a total amount of $11500 which is $76.5 less than the compound interest. It is a simple thing that we get more interest or more profit from the compound interest technique and at the same time its main point is that the more times we add the interest to the principal, the more profit we will get, as in the example we added the interest once in 1 year and if we add it more than once then it becomes a bit difficult to calculate it in this way, so for easy calculation we will see its formula

The Compound Interest Formula

A = P × (1 + r/n)^n × t

Where

• A = Future total amount of investment or loan (including interest)

• P = Initial investment amount (principal)

• r = Annual interest rate (decimal)

• n = How many times interest is being compounded per year

• t = Time (in years)

Compound Interest Calculation (Monthly Compounding Example)

Example. Suppose you have invested an amount of $10000 at 7% annual interest rate for five years and interest is being compounded once a month then how much money will you earn after 5 years?

Ans. We know the formula of compound interest

A = P × (1 + r/n)^n × t

Where

• A = Future total amount of investment or loan (including interest)

• P = Initial principal which is $10000

• r = Annual interest rate which is 7% and if we convert it to decimal as per the rule then it becomes 0.07

• n = How many times interest is being added per year so here interest is being added once a month i.e. in total it is being added 12 times in 1 year

• t = Time in years so here we have 5 years

Now we have

• P = $10000

• r = 0.07

• n = 12

• t = 5 years

Now we will put this values in the formula

A = P × (1 + r/n)^n × t

A = 10000 × (1 + 0.07/12)^12×5

A = 10000 × (1 + 0.0058)^60

A = 10000 × (1.0058)^60

A = 10000 × 1.41

A = $14100

So here we will get a total amount of $14100 after five years and if we subtract the principal from this amount, then it will be our compound interest which is $4100 

Common Asked Questions (FAQ's

1) What is Compound Interest?

Compound interest is the type of interest where your money earns interest not only on the original amount but also on the interest that keeps getting added over time. It helps your investment grow much faster than simple interest.

2) What is the formula of Compound Interest?

The standard formula is:

A = P × (1 + r/n)^(n×t)

Where:

  • A = Final amount
  • P = Principal
  • r = Annual interest rate
  • n = Number of compounding periods per year
  • t = Time in years

If you want only the interest earned:

CI = A − P

3) How to calculate Compound Interest?

To calculate compound interest, plug the principal, interest rate, compounding frequency, and time into the formula. The result shows how much your money grows with compounding.

Example:

  • P = $5,000
  • r = 8%
  • n = 1 (compounded yearly)
  • t = 3 years
  • A = 5000 × (1.08)^3 = $6,299.20

Compound Interest = $1,299.20

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About the Author: Abhishek Lohar

B.Com Graduate and the Founder of Free Online Financial Calculator. I specialize in simplifying complex financial calculations and investment strategies. My mission is to ensure you can make confident financial decisions using our research-backed content and accurate calculators. More About Me

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Disclaimer: The information provided in this article is for educational purposes only and should not be considered financial advice. Please consult with a qualified professional before making any investment decisions.