Many people prefer simple interest over compound interest as it is easy to calculate. There are several prejudices against compound interest. But if you properly pay attention, compound interest gives more return on interests as compared to simple interest. According to Albert Einstein, “He who understands it, earns it… he who doesn’t pay it.”
Compound interest is the calculation of interest where the interest amount is added along with the principal amount. This means, all the previous interest paid or earned will be taken into consideration while calculating next time.
There is a standard formula that is used for calculating compound interest:
P1 = P(1+r/n)nt
P1 = new principal amount
P= original principal amount
r= rate of interest
n= compounding frequency
t= total time the interest will be charged
Then, the compound interest will be calculated as the final value minus the original principal amount.
Compound interest has a major beneficial impact on investment. This is what one needs to understand… Compound interest happens when interest is being added upto the initial deposit or the principal which leads to interest gaining interest. Institutions dealing with finance usually provide compound interests on the various deposits, regularly compounding—mostly annually or monthly.
The compounding interest would increase investments with no additional deposits, despite the fact that one might definitely decide to do more deposits over a period of time — expanding efficiency of compound interest.
The compound interest calculator has a greater number of characteristics than most. One could vary the compounding intervals and deposit intervals from daily to annual basis (and all else in between).
Such adaptability permits a person for calculating and comparing the interest earnings anticipated with regard to the varied situations pertaining to investment. Hence, one would be able to understand that whether an 8% return, which is daily compounded, is much better when compared to an annually compounded 9%.
It is easy to use this calculator. The results from these calculators are requested to be considered only as estimates. Changing compounding intervals and deposits lead to equations which are extremely complex. The results of real investments might change.
There are certain perks compound provides:
- You will be earning interest on the previous interests along with the principal amount you invested.
- Faster growth of the interest.