What is the concept of Compounding?
In layman terms, compounding is a procedure that takes place when your earnings grow exponentially as you get interested in your investment within a period. There are endless possibilities when it comes to compounding. This is because the investment gets the capability to earn by itself.
Compound interest is a great way to enhance or boost your earnings as time passes. It just doesn’t stop here. Compound interest allows your investments to grow exponentially well. Latest learn more about what is compound interest and what are the benefits of the same. At the same time, we will learn the use of a compound interest calculator as well.
How Do You Calculate CI ? Compound Interest Formula
Here is the compound interest formula:
A = P (1 + r/n) ^ nt
In this formula, P stands for the principal amount, r stands for the rate of interest per annum and n indicates the no. of times that the interest gets compounded in a year. Finally, t denotes the total number of years.
Rohit invested ₹50, 000. It offers an annual interest of 10% for a period of five years. The interest for the initial year with compound interest will be 50,000 x 10/100 that will give you ₹5000. Similarly, the interest for Rohit’s second year will be formulated in the same manner. It will be calculated on the accumulated amount which is 50,000 + 5000= 55,000
Here, the interest for the 3rd year will be calculated in this manner:
50,000 + 5,000+ 5, 550 = 60,550 x 10/100 = ₹6055
Similarly, following the same calculation, the interest for the fourth year for Rohit’s initial investment will be calculated in this manner:
50,000 + 5, 000 + 5, 500 + 6055= ₹66, 605 x 10/100= 6,660.5
Moving on to the 5th year, the final interest will be calculated in the compound interest formula following manner: 50,000 + 5,000 + 5,550 + 6055 + 6,660.5 = ₹73265.5 x 10/100 = ₹ 7,326.55