What is the difference between simple and compound interest on rupees 10000 at 10%?

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What is Compound Interest?

The interest on a loan or deposit calculated based on the initial principal, and the collective interest from previous periods is called compound interest. It is basically 'interest earned on money that was previously earned as interest'. This allows your sum and interest to grow at a faster rate compared to the simple interest which is calculated only on the principal amount.

The rate at which compound interest accumulates interest depends on the frequency - higher the number of compounding periods, higher will be the compound interest. For instance, if you earn a 10% annual interest, a deposit of Rs 100 would gain you Rs 10 after a year. What happens the following year? That’s where the compound interest comes in. You’ll earn interest on your deposit, and you will also earn interest on the interest you just earned.

The longer you leave your money untouched, the greater it will grow because compound interest grows over time which means your money keeps on multiplying over a period of time. If you are repaying a loan on compound interest, you should not ignore paying the interest or if there is any delay in paying the loan, then the interest burden will be high. To take advantage of compounding, one must aim at increasing their frequency of loan payments. This way you can pay less interest than what you are liable to pay.

Since the interest-on-interest effect can generate positive returns based on the initial principal amount, it has sometimes been referred to as the snowball effect of compound interest.

How does Compound Interest Work?

If you make a sound investment, compound interest can help you to build your wealth over time. But if your debt is subjected to compound interest, then it can cause financial hardship if not planned. To understand how compound interest works, let us break down the process of how your investment can compound better.

Compound Interest starts when your investment earns interest. At this point, the interest is added to the initial investment amount. When it earns interest again, it will determine the newly earned interest by calculating the initial capital invested and the earned interest.

As the size of the investment continues to grow, it will earn interest to the total investment amount. This loop will continue allowing the investment to grow substantially without any additional investment capital. With time, this cycle has potential for a substantial growth of the original investment.

Here are the two factors that will have an impact on your compound interest returns:

• Time - You need to allow your investments to grow with time, the more time you enable, the more growth you will see.
• The rate of interest - A higher rate of interest will generate higher balance when compounding the investment.

You can decide your investment priorities and goals, keeping in mind the various scenarios & avenues and how it will impact your life.

The bottom line is that if you are able to harness the advantage of compound interest then it can work wonders for your investment plan and financial goals.

Compound Interest Formula & Steps to Calculate Compound Interest

Compound interest is a method of earning interest on your invested money. To calculate compound interest, you first need to know:

1. Your principal investment amount
2. The rate of interest your investor offers
3. The number of times your interest gets compounded per year
4. The number of years that you want to stay invested

Once you have these figures, you can quickly understand how much you will earn from an investment that uses the power of compounding interest.

The compound interest formula is:
A = P (1+r/n)nt

The values are:
A = Future value of the investment
P = Principal amount invested
r = The rate of interest (decimals)
n = Number of times interest gets compounded per period
t = Number of periods the money is invested for

Let’s look at how you can calculate compound interest using the given formula. Say you have invested INR 10,000 for 10 years. You earn 5% interest on your investment and your interest gets compounded annually. So, in the first year you earn INR 500 on your investment of INR 10,000. In the second year, your principal amount changes to INR 10,500. You now earn INR 525 as interest on your new principal amount, so you now have a total of 10,500 + 525 = 11,025. If you use the formula above, you can quickly understand how much you will have at the end of ten years.

P = INR 10,000
r = 0.05
n = 1
t = 10

A = 10000 (1 + 0.05/1)10 = INR 16,288.95
So, the total interest you earned is INR 6,288.95.

How to use the Compound Interest Calculator?

If you’re wondering what kind of interest rate you need, you can check out our

. To start, you need to know how much money you have to invest upfront. Input this number in the given box. Next, if you’d like to add more money to your investment at regular intervals, you can choose to do so. Type in the amount you’d like to add and choose whether they will be monthly or annual payments. Next, decide how many years you’d like to invest for. Will you be making the regular payments for 5 years, 10 years or 25 years? You can either move the slider or simply input the number of years in the provided box.

Once you’re done putting money in your investment, you can choose to remain invested for a longer time. This means that your interest will continue to compound and your money will grow over time. When selecting the number of years you’d like to stay invested for, it’s important that it’s more than the number of years that you want to invest for. Again, you can either move the slider or input the number directly in the provided box. If you have an understanding of how much money you would like at the end of the investment term, you can check the graph on the right-hand side of the page. As you change the rate of interest, either by shifting the slider or inputting numbers in the box, you’ll see how much money you can expect to earn at the end of your investment term.

This will give you a clear indication of what is the best rate of interest for you to choose based on your investment capabilities, the amount of time you want to invest for and the amount of money you hope to have at the end of the investment.

Compound Interest Example

You can calculate compound interest with a simple formula. It is calculated by multiplying the first principal amount by one and adding the annual interest rate raised to the number of compound periods subtract one. The total initial amount of your loan is then subtracted from the resulting value.

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)

Compound Interest = P [(1 + i) n – 1]

P is principal, I is the interest rate, n is the number of compounding periods.

An investment of ₹ 1,00,000  at a 12% rate of return for 5 years compounded annually will be ₹ 1,76,234. From the graph below we can see how an investment of ₹ 1,00,000 has grown in 5 years.

In compound interest, one earns interest on interest. Therefore, it already takes into consideration all the previous interests. And interest is paid on that.

By understanding how compound interest works and acting on it by investing in the right set of investments, you can achieve high returns.

Simple Interest and Compound Interest Calculator

There are two ways to calculate interest – simple interest and compound interest. Both types of calculation have their own advantages. Let’s take a look at the difference between simple interest and compound interest calculation:

Simple Interest Formula

Some investment avenues operate with simple interest. To ensure you’re making an informed decision, you should know how to calculate both compound and simple interest. Let’s take a look at the Simple Interest formula:

SI = (P x T x R)/100

The values are:
P = Principal amount
T = Number of years
R = Rate of interest

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