Total compounding frequency (N) = 20 (i.e.How to use the compound interest calculator?.

Compounding frequency per annum (n) = 4.

Let’s identify the values of the variables we need and then plug those values into the compound interest formula.

rate of return, and you keep the amount invested for 5 years. Say you’ve invested ₹5,00,000 in a Fixed Deposit that compounds interest quarterly. Now that you know the compound interest formula let’s use it to calculate compound interest. T= The time period in a number of years Example for Compound Interest Calculation: N = Total compounding frequency for the entire period The N in the formula stands for the total number of times the interest is compounded ,and n stands for compounding frequency per year. The P in the formula stands for the principal amount of the investment, and R stands for the interest rate.

The compound interest formula is simple and involves four variables P,R,N,n. Conversely, in the case of debt, compounding interest will result in higher interest payments in debt, which will increase your financial burden. Starting early allows your investments more time to compound, maximising your returns. In conclusion, compound interest can work in your favour while investing, allowing your money to grow over time. The interest earned accumulates at a quick pace over time. With each compounding cycle, the base for computing interest grows larger, resulting in a snowball effect. The higher the investment period, there will be more compounding, and it will give more time for your investment to grow.

The investment period is also positively related to compound interest.

The higher the interest rate, the more you will accumulate in your investment period.

The rate of return is positively related to the compound interest.

Hence, in the long term, you can generate more wealth due to the power of compounding.Ĭompounding interest is affected by two factors: Rate of return and Investment period:

This process continues yearly, and you earn interest on the combined balance of principal and earned interest. Then, this interest is added to the principal, and in the next period, interest is calculated on this combined balance.

It starts with when your investment starts earning interest. Compound interest calculates interest on the principal and interest components.

Excel yearly compound interest table