What Is Compound Interest?
Before you start using the compound interest calculator, It is very important to know what exactly is compounding?
In simple terms compounding means the ability of money to grow when the gains of year 1 is reinvested for year 2 or more.
Compound interest is also termed as “Future Value (FV)” of the money. If we have to analyze, what would be the value of money that we have today sometime in the future, then we need to move the ‘money today’ through the future i.e. future value of that money.
One of the prominent scientist of this century, Nobel Prize winner in Physics Albert Einstein quoted once about same.
He said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”
This classic statement may sound absurd to you at first, but it is vital for wealth building. Let us first dig deeper and understand the rationale behind compound interest.
If you ask any person older than you what they wish they had more of, most probably they will tell you they wish they had more time.
Compound interest affects everyone the same, because it depends on time.
Millionaires around the world know how to mobilize the power of compound interest. Don’t think they are much smarter than you, harder working than you, or have any magic wand with them .
They just understand how compound interest works and they use it to the fullest.
You might have heard of this famous French proverb “Rome wasn’t built in a day” which simply means nothing can be build overnight, important work takes time.
You were not born and started walking or running, jumping here and there, it took immense effort and time for your family to raise you at a level where you are right now.
It took efforts by you every time you fall and most importantly, time. I know, you can say, that’s the natural process of how human beings are raised, but the point I want to put is the effect of time.
Having said that let us come back to the point of what is compound interest, and how it may help you to be financially free.
Suppose, you started investing at a young age of 25 years till you reach 50, or if your family had invested till you have reached the age of 25 year, only ₹10,000 (use your country currency) per year in any stocks or index funds with normal 10% returns, keep in mind, it’s very normal in market.
Just to inform you Nifty next 50 (index) alone have given 17.2% return on average every year since its inception and there are many stocks who have given more than 20, 30% return every year.
This would have given you ₹1,08,347, remember it is just one time investment of 10,000 not every year and the percentage of return is nominal.
This is how it looks on chart:
Checkout Moneycontain Monthly SIP Calculator with inflation Here to know how much you need to invest a month to reach your financial goal.
Nifty50 & Next 50 Index CAGR (Compounded Annual Growth Rate) Since inception:
I thought you might not believe what I said above so let me present the facts to you, check the image below:
People choose index because of less risks involved, that’s why the return is moderate, however if you invest in good stock(fundamentally), the return would be much bigger.
As an example:
MRF shares have generated multi fold returns for the investors over the years.
If an investor had invested Rs 1 lakh in MRF shares 25 years ago, the corpus would have been worth Rs 74.02 crore in April 30, 2018 when the stock was its peak.
Even 1 share costed Just Rs.11 in the year 1993 which at the peak(2018) was around Rs.81,423.
According to BSE data, the MRF’s shares grew sharply by 2,210 percent between May 11, 2009 to May 9, 2019. The stock growth consolidated to 154.83 per cent in the last five years.
Check the lifetime MRF chart below:
So, instead of you buying a fancy item, which is nothing but a liability, could create a asset from the same money. However, it’s up to you to decide, the early you do, more beneficial it is .
What Is Compound Interest Formula?
In the above compound interest formula:
A= Total Amount Receivable(at the end)
P= Total Amount Invested(initially)
R= Rate of Interest
T= Time(invested period)
N= No. of times the compound interest you receive in a year (yearly, half-yearly, quarterly, monthly)
How To Use Compound Interest Calculator?
In below Compound Interest calculator, just enter the amount you want to invest at start, expected return means, interest rate you are targeting or expecting, in time enter the period for how long you want to remain invested and than the number of times interest is paid each year, for this if you are getting it once a year enter 1, twice a year put 2, thrice put 3, so on and so forth.
Go ahead and try it yourself, I hope you get success with all your future investments and do not wait, start as early as possible.
Using above calculator can you answer few compounding questions?
1. A sum of Rs. 50,000 is borrowed and the rate of interest is 10% per annum. What is the compound interest for 5 years? Hint:(C.I=total accumulated wealth- sum borrowed)
2. How much is Rs.50,000/- in today’s terms (2020) worth ten years later assuming an opportunity cost of 9.5%(p.a)? Hint(opportunity cost is rate of interest)
Here is the link to use our Discounting calculator, also known as present value or net present value(NPV) to know the present value of any investment you made in future.
You can also check Moneycontain Lumpsum SIP Calculator with inflation to know how much need to invest to day to reach your future financial targets.
In case you are looking to buy a home than please check this ultimate guide on home loan and Moneycontain home Loan calculator. It calculates your monthly EMI’s as well as Interest amount and lot more.
You can also check my reviews on best brokers in India here:
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Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the compound interest calculator and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments