It may seem a little complex to understand compound interest, but it’s not the case. Compound interest is the interest you earn on the principal amount, which is reinvested. Thus, it helps you earn more money. Here are a few things you need to know about compound interest or compounding interest.
It is possible for you to earn interest on your principal balance with compound interest. Not just that, you can also earn interest on your interest, thanks to compound interest. In simpler words, compound interest adds the earned interest to your principal balance, which in turn earns you more interest. It is called compounding your returns. Here’s an example of how compound interest works:
- Your current balance in your savings account is 1000 rupees, and the annual interest is 5%.
- Now in one year, you will be earning 50 rupees, which makes your new balance 1050 rupees.
- You will again be earning 5% annual interest in the second year, which is now 52.50 rupees.
- Now your new balance is 1102.50 rupees.
- If you kept the 1000 rupees in your savings account for 30 years without spending any money from the account, then you would still end up with 4321.94 rupees in your bank account.
Because of compound interest, you will be able to earn interest on the interest added to your account. The higher your amount, the more you will be receiving as interest. This adds a positive touch to the quote, “The rich become richer”. If you are having a tough time calculating compound interest, then you can take the help of a compound interest calculator available online.
How does a compound interest calculator work?
There are many compound interest calculators available online that you can choose from. Once you choose one, you will be asked a few questions about your investment. You will be required to add your principal amount (the amount that you will be investing initially), the rate of interest and lastly, the time period (tenure). After you have successfully added all the information correctly, the results will be out. The calculation will be done based on that, and you will find out what to expect by the end of your tenure.
How can a compound interest calculator help you?
- A compound interest calculator helps you determine the percentage of interest and accurate figures that you will earn by the end of the tenure.
- It will help you secure a financially independent future for you and your family when you find out what to expect by the end of the tenure.
- It will help you secure a financially independent future for you and your family when you find out what to expect by the end of your tenure.
- It will make you understand how much you need to invest over time to build a corpus for your future.
- Once you have established the amount required for you to live a financially secure life, you can start adding that much money to your account.
These are some of the things you need to know about compound interest. Getting in touch with an expert in the field is always recommended for better decision making from your end.