What Is Compound Interest
Compound interest is interest paid not only on the original principal but on the interest already accumulated. Each compounding period adds a slice of interest to the balance, and the next period's interest is calculated on the larger balance. Over long horizons the curve bends sharply upward which is why Einstein, maybe apocryphally, is said to have called compound interest the eighth wonder of the world.
The Formula
A = P x (1 + r/n)^(n x t)
Where P is principal, r is the annual rate written as a decimal (8 percent is 0.08), n is the number of compounding periods per year and t is the duration in years. When you also contribute money each month, the formula becomes a month by month ledger which is what this calculator does under the hood.
How to Use This Tool
- Choose a currency so the result is shown in the right symbol.
- Enter the principal, which is the amount you are starting with.
- Optionally add a monthly top-up to simulate adding to the account every month.
- Enter the annual interest rate and the duration in years.
- Pick the compounding frequency. Banks usually compound quarterly; many investment products use monthly.
- Press Calculate. The result card shows final value, total invested and the interest portion.
Does Frequency Matter?
Compounding more often does produce a slightly higher balance, but the difference is smaller than popular finance posts suggest. For a 10 percent rate over 10 years, moving from annual to monthly compounding bumps the result from 2.59x to 2.71x, and daily goes to 2.72x. The two bigger levers are always the rate and the time. A 2 percent lift in the annual rate is worth more than any compounding frequency change.
Compounding vs Simple Interest
Simple interest computes interest only on the original principal. If you deposit Rs 100,000 at 8 percent simple for 10 years, you earn Rs 8,000 every year for a total of Rs 80,000 in interest. Compound interest at the same 8 percent returns about Rs 115,892 in interest over 10 years, because the base grows each year. The gap between the two methods widens the longer you leave the money in.
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Frequently Asked Questions
What is compound interest?
Interest earned on both principal and accumulated interest.
What is the formula?
A = P x (1 + r/n)^(n x t) plus monthly contributions if any.
Does compounding frequency matter?
A little, less than rate or time.
How is it different from simple interest?
Simple interest never adds the interest back to the base.
Does it handle monthly top-ups?
Yes.
Can I use this for an FD?
Yes, usually with quarterly compounding.
Is my data stored?
No.