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Compounding can be defined as an exponential increase in the interest value, due to earning interest on both principal and accumulated interest. So the interest earned is re-invested. So we can assume how powerful compounding could be and how does it grows our wealth . Start saving now to reap the benefits from your investments and compounding calculator will reveal to you the power of compounding.
If you are early in your career it seems that you have lots of time to save but, saving now will give you a huge sum in your finances. So, for an example, if you have Rs. 100 to invest for 10 years at 5% p.a.,then for first year your total amount is Rs. 105 and then this amount will be the principal amount for second year and total amount of second year will be principal for third year and so on. Hence, this will give a large margin irrespective of other interests. Power of compounding calculator will give answers to all your questions.
The above example must have given you a fair idea of how compounding works theoretically. If you are planning to invest money using compounding, you can use the power compounding calculator to see for yourself, how your small investment can give you great gains over a period of time. Here is how the compounding calculator tool from Budwisefunds works:
1. Enter the amount to be invested under the TAB invested amount.
2. Now enter the compounding interval which is (yearly, half- yearly, quarterly, monthly)
3. Enter the time period for which you want to invest your money.
4. Enter the interest rate per annum expected on your investments.
5. The Budwisefunds power of compounding tool reveals the wealth gained on your total investment with final corpus Value.
6. So, by entering different compounding intervals, you can see the magic of compounding and how multiple compounding in a year is a great way to create your wealth over a long period of time.
You are now good to invest your money and reach your financial goals. This is not fantasy; this is reality, live and see yourself with us.
Compounding favors those who start early and your money will grow to a large amount with small initial investment. Thus, concept of compound interest can be your best friend. As soon as you make a deposit, you will start growing your saving at a steady rate and then these savings will grow exponential over a time. Compounding appreciates those who are thinking for long term.
Let us understand this with an example:
1. Let us assume Suresh has a sum of Rs. 50000/-to invest when he is 35. Expecting an interest rate of 8%, he opts for monthly compounding.
2. On the other hand, Mahesh also invests Rs.50000/- but he begins when he is 45, compounding monthly at 8%.
3. Both continue to invest till they are 60.
4. As per the compounding calculator,
| Suresh | Mahesh | |
|---|---|---|
| Invested Amount | 50,000 | 50,000 |
| Compounded | Monthly | Monthly |
| Investment Period | 25 | 15 |
| Interest Rate | 8 | 8 |
| Total Investment | 50,000 | 50,000 |
| Wealth Gained | 3,17,000 | 1,15,346 |
| Maturity value | 3,67,008 | 1,65,346 |
5. Using the power of compounding calculator, investors can estimate the amount they need to invest to reach their financial goals.
Interest is the amount that you may have to pay or earn if you borrow or lend money. Putting it simply, it is the price of using money that belongs to someone else.
Expressed usually as annual rate of interest, in terms of business it is defined as a percentage on principal. Interest can also be calculated for shorter or longer durations than one year.
So, if you are depositing or lending money to banks or other organizations, then you get a rate of interest because they are using your money. This interest rate encourages people to make deposits. Although today rate of interest is very competitive, they are not same for every bank, every organization. Similarly, if you take a loan, then you have to pay the bank or the organization interest to use their money.
Simple Interest
This represents the most basic type of rate. Simple interest is paid only once and never changes. For example if person A borrows Rs. 100 from person B, for one Year, at a rate of 10%, then principal amount is 100, Time is 1 year, Rate is 10 and net amount payable after one year to B would be Rs. 110.
Formula is just to multiply the principle by the rate % and the term.
A = P (1+R/100*T)
Where,
A = P+I
I = PR/100*T
P – Principal
I – Interest
R - Rate
T – Time
Compound Interest includes the interest on the principal and as well as the interest on the earned interest. For example, if person A borrows Rs 100 from person B at a rate percentage of 10 for a term of 2 years, the interest at the end of first year will be 10. Then for the next year the principal amount will be 110 and the interest at the end of second year will be Rs.11. Hence, total interest would be Rs. 21 after 2 years, so person B will get total amount of RS 121. When compounded for larger amounts, over longer durations, this Compound Interest returns huge amounts giving large benefits. Compound Interest is mostly charged on credit cards and given on fixed deposit accounts.
TYPES OF COMPOUNDING : YEARLY, HALF-YEARLY, QUATERLY, MONTHLY :
Compounding is calculated yearly, half- yearly, quarterly and monthly.
Yearly Compounding
This calculates total compound interest payable on the annual compounded period.
CI (yearly) = P (1+R/100)^n
Half-yearly compounding
This calculates total compound interest payable base on the semi-annual compounded period.
CI (half-yearly) = P (1+R/2)/100)^2n
Quarterly compounding
This calculates total compound interest payable base on 3 month compounded period.
CI (quarterly) = P (1+R/4)/100)^4n
Monthly compounding
This calculates total compound interest payable base on monthly compounded period.
CI (monthly) = P (1+R/12)/100)^12n
*where,
P = Initial principal sum of money
R = Rate in percentage
n = Time period in years
CI = compound Interest
1. You will be more confident.
2. You will have more options to pursue the right opportunity.
3. Your quality of life will improve.
4. You are more likely to find compatible social circles early.
5. You will end up wasting less money.
6. If you start yearly, nearly 30+ years before retiring, you have ample time to put in an appropriate risk based fund. Besides, starting early gives you the leverage of being able to bounce back and recover financially if the market dips.
7. This is a life saving stage.
8. You will learn to manage your investment risk better.
9. You will have time to correct your past financial mistakes.
Compounding is the best secret of creating wealth and the earlier you start, the better it is. The compounding calculator can give you a great idea of how your investment will grow by the time you retires. The concept of compounding is used worldwide without any doubts. The power of compounding calculator has worked for many people to help them achieve their dreams.
Those who wish to grow their wealth but are wary of investing large sums can go for SIP. It is a simple way of investing a small amount every month in Mutual Funds instead of one large investment and gain great returns with the power of compounding. SIP offers to give substantial gains over the years as it has better standing against market volatility. The outflow of small amounts every month for investment is easy and does not hamper other financial responsibilities.
To understand the power of compounding in SIP, consider this example. If you invest Rs. 1000/- every month in SIP at 8%, then after 10 years, the amount would be Rs. 184,165/-. If you continue then after 20 years the corpus would grow to Rs. 592,947/- and so on. The trick is to be patient and let your money grow.
Single compounding - In case of single compounding, a certain amount will earn interest for only once in the whole year. We represent interest in this case as per annum return.
Multiple compounding – In case of multiple compounding, a certain amount earns interest on interest multiple times which could be on a monthly, quarterly or half yearly basis.
For e.g. the value of Rs 1 lac invested @10% on a yearly as well as monthly compounding basis will be:-
| Yearly Compounding | Monthly Compounding |
|---|---|
| 1,10,000 | 1,10,471 |
Q1. What is the meaning of Compounding Interest?
A. While Simple Interest is calculated on the Principal, Compound Interest includes the Interest accrued on the Principal amount. This makes the principal amount much larger, increasing the Net Interest gained.
Q2. Can Compounding help in saving better for retirement?
A. Compounding helps to grow money faster as it gives you Interest on Interest. But if you use periodic compounding, where the interest is added to the principal at a fixed time interval rather than only once a year, then the growth of your money accelerates. If you invest Rs.1000/- for 10 years at 5% return, you will earn Simple Interest of Rs.500. If you invest the same amount in a fund that compounds annually then you will earn interest of Rs628.89 after 10 years. But if you invest in a Fund that compounds monthly, your earning will be Rs.647, Rs.19 more than if compounded annually. So, compounding can give you higher returns and save better for retirement.
If you still have any other questions/ queries in mind, do not hesitate in contacting us.
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