The interest rates are calculated in two ways on your investments. The first one is a simple interest, whereas the second one is a Compound interest. This type of interest rate calculation method is followed by banks and other financial institutions.

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What is Simple Interest?

It is the total interest calculated on the principal amount. The formula to calculate simple interest is:

=(Principal Amount X Rate of interest) / 100

Example:

Principal Amount = 100,000/-

Rate of Interest = 16% Per year

Total Interest = (100000 x 16) /100= Rs. 16000/-

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What is Compound Interest?

Compound interest is interest on interest. In other words, in the first year, you may earn some interest. In the next year, your first year’s interest is added to your principal amount. Therefore, in the second year, you will get interest on your previous interest earned. This is subject to, you should not withdraw your interest earned every year.

Therefore, Compound interest is very important in the case of investments. The interest you earn every year adds to your principal amount. Therefore, the longer you keep your investment, the more your income will be. Check this with the below compound interest calculator.

Formula: A = P(1 + r/n)^(nt)

A = final amount
P = initial principal balance
r = interest rate
n = number of times interest applied per time period
t = number of time periods elapsed

Compound Interest Calculator

Present Value:        
Interest Rate(%):     
Years of Compounding: 

Total Interest: 
Future Value:   

Tip: The early you understand the power of compounding interest, that much early you can become a crorepati!