What is the Power of Compounding Calculator?Ĭompounding is when the returns earned from an investment are reinvested to generate additional earnings over time. The magic of compounding works only over long periods of time. Even though the amounts look very small, it makes a huge difference in the long term. The interest earned for the second year is INR 6.36, this is 0.36 more than the previous year. Instead of withdrawing the interest amount, it is reinvested, then the principal amount for the second year becomes INR 106 (INR 100 + INR 6). The principal amount is INR 100, and the interest earned at the end of 1 year is INR 6 (6% of INR 100). įor example, INR 100 is invested, and the compound interest rate is 6% p.a. Most long term financial goals become easier and achievable because of the power of compounding. An average investor depends on this tool to plan for their financial goals. Compounding is a technique that makes money work harder. Use the compound interest calculator to see how the magic unfolds with time. To make the maximum advantage of the compound interest, invest a small amount regularly for long periods of time. One doesn’t have to be a financial analyst to understand the concept of compounding. The frequency of compounding varies based on the scheme offered by the bank or financial institutions. A credit card loan is usually compounded monthly and a savings bank account is compounded daily. The frequency of compounding depends on the instrument. The higher the frequency of compounding, the greater the amount of compound interest. Frequency of compounding is basically the number of times the interest is calculated in a year. With time, compound interest only further enhances the earnings, and the investment grows manifold.Ĭompounding is done on loans, deposits and investments. The possibilities of the compound interest are endless. An early start would give the investor a higher compounding effect, and building wealth becomes easy. The right advice is to start saving regularly and invest wisely. Longer, the investment horizon higher are the returns. In the long term, this technique will benefit the investor. This powerful tool (compound interest) can be used by investors to plan their financial goals. When the principal includes the accumulated interest of the previous periods and interest is calculated on this then they say its compound interest. Reinvestment of earnings at the same compound interest rate of return would help in continually growing the principal amount year-on-year. The value of the investment keeps growing at a geometric rate (always increasing) rather than at an arithmetic rate (straight-line). It is because the interest of your invested money is also earning interest.
Reinvestment of earnings at the same rate of return to grow the principal amount every year is compounding.
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