Compound interest is one of the most powerful financial tools. It is the reason why a small investment can grow into a large sum over time. It is also why you should start saving as early as possible.
So today, in this blog post, we will talk about what compound interest is, how it works, and how you can use a compound interest calculator to help you grow your wealth.
What is compound interest?
Compound interest is a type of interest that’s earned on both the principal amount and the already earned interest. This ultimately means that your money is working for you, earning interest on interest.
For instance, let’s say you invest $100 in a savings account with a 5%
interest rate. So after one year, you will earn $5 in interest. But next year, you will earn interest on the principal of $100 and $ 5$ you made in interest in the previous year. So, your second-year interest will be slightly more than $5.
If we calculate yearly, this amount seems very small, but if you calculate it accumulative, you will notice a huge amount. Over time, the effects of compound interest can be dramatic and amusing. So let’s now learn how a compound interest calculator can help you.
The average annual interest rate on savings accounts in India is around 4%. So if you calculate the amount of 2000 rs. Monthly for ten years, and we expect that the interest rate will remain stagnant at 4% so that we will receive an amount of 2.95 lakhs after ten years.
How can a compound interest calculator help you?
A compound interest calculator helps you to see how much your money can grow over time. There are many different types of compound interest calculators available online.
You will need the following information for using a compound interest calculator:
- The principal amount, or we can say the amount you’re investing
- The annual interest rate
- The number of years you’re investing
The calculator will then show you how much your money will grow.
A study by the National Institute of Bank Management found that the average Indian household has a savings rate of just 10%. This means that most Indians are not taking advantage of the power of compound interest.
However, there are a growing number of Indians who are starting to save and invest. And as more people do so, the power of compound interest will help them grow their wealth over time.
How to start using compound interest to grow your wealth?
If you start using compound interest to grow your wealth, here are a few things which you need to do:
- Start saving and investing as early as possible. The earlier you start, the more time your money will grow.
- Choose an investment plan with higher annual returns. The higher the interest rate, the more your money will grow.
- Reinvest your earnings. This will compound your money even faster.
Conclusion
Using a compound interest calculator lets you see how much your money can grow over time. And by following the tips above, you can put compound interest to work for you and grow your wealth.
