Compounding is the rise in the value of an investment because of the interest gained on the principal amount and the accumulated interest. When you invest money in investments that provide compound interest, you can build a significant financial corpus.
In this article, we will explain a few tips for calculating compound interest on investments.
When you invest money in investments that provide compound interest, the interest accrued on your principal amount and the accumulated interest is added to the principal amount. Hence, compounding can enable your money to grow exponentially.
Thus, it is recommended to stay invested for a longer time to gain higher benefits of compounding. This is because the more time you must invest, the more your investments can grow at a faster rate. Compounding allows the earning of investment returns on the initial amount and on the accumulated interest – which creates more interest.
Let’s take a look at an example to understand compounding-
You put Rs. 1 Lakh in an investment instrument that offers 2% interest annually and is compounded annually. If you leave it untouched, after a year, then your balance will be Rs. 1.02 Lakh. If you reinvest the additional Rs. 2,000, then your balance will be Rs. 1.02 Lakh + Rs. 2,000 = Rs. 1.04 Lakh. The same process will continue every year, and your balance will continue to grow exponentially.
Tips to Calculate Compound Interest on Your Investments
In order to understand how compounding works, you can use a compound interest calculator. You must enter a few details to use the calculator.
How to Use Compound Interest Calculator-
- Enter the amount of money you want to invest.
- Then, in case you want to add more money to your investment, you can enter that amount. After that, enter the investment frequency.
- Then, enter the number of years you want to invest for.
Once you enter the details, the calculator will calculate how much money you can accumulate at the end of the tenure.
Benefits of Compound Interest Calculator
It is Easy to Use
You can use this calculator very easily. You need to enter the details, such as the investment amount, investment period, and expected return. After that, the calculator will provide you with the results.
It Can Help You Plan Financial Goals
This calculator allows you to calculate the profit you can gain from the investment. Hence, the compound interest calculator can help you plan for your finances and accumulate money to achieve financial goals.
Things to Keep in Mind While Investing in Investments that Offer Compound Interest
When you start investing from an early age, you have more time to stay invested. The benefits of compounding increase the longer you stay invested. Hence, you can earn significant returns by starting investments from an early age.
Keep a Track on Spending
By keeping track of your spending, you can save more money. You can invest this money. Hence, you can increase your investments. This can allow you to earn higher returns.