Compound interest is the sum of interest on savings calculated on principal amount (initial) and the accumulated interest from previous periods. Under this model, the interest accumulates after each calculation and subsequent calculation is done on the accumulated interest as well as the principal. In short, you earn interest on interest.

Say you invest Rs 10,000, on which you earn a compound interest of 5% per annum. After the first year, your investment would fetch an interest of Rs 500Kanpur Investment. In the second year, Rs 500 would be added to Rs 10,000 to calculate the interest for that year. So, in the second year, you will earn 5% on Rs 10,500, which comes to Rs 525.

In the third year, Rs 525 would be added to Rs 10,500 to calculate returns, and the process would continue. This is how compounding of returns works.

Monthly compounding accelerates the growth of your investments and savings. By calculating interest more frequently, you earn interest on interest more often, leading to a higher accumulated amount over time.

Compared to annual compounding, monthly compounding provides higher returns. This is because interest is added to the principal twelve times a year, helping your funds to grow quicker.Surat Stock

With higher and more frequent interest accruals, you can reach your financial goals faster. Whether it’s saving for a home, retirement, or education, monthly compounding can shorten the time needed to accumulate the desired amount.Jinnai Wealth Management

Monthly compounded interest helps combat inflation more effectively than simple interest. As your investment grows at a faster rate, it helps maintain your purchasing power against the rising cost of living.

Understanding and utilising monthly compound interest allows for better financial planning. You can accurately predict the growth of your savings or investments, aiding in more precise goal setting and achievement.

There’s a simple formula for calculating compound interestGuoabong Wealth Management. It is as follows –

M = P {(1 + R/T) ^ N * T}

In the formula, the values are expressed as follows –

M = maturity amount

P = invested amount or principal

R = rate of interest

T = compounding frequency

N = investment tenure

So, if you deposit Rs 50,000 for 5 years at an interest rate of 6% per annum, compounded annually, the maturity value would be calculated as follows –

M = Rs 50,000 {(1 + 0.06/1) ^ 5 * 1}

= Rs 66,911

Compound interest = Rs 66,911 – Rs 50,000 = Rs 16,911

While compounding gives increasing returns every year, compounding frequency plays an important aspect in growth. The higher the compounding frequency, the higher would be the returns that you get.

Here’s an example to understand –

Scenario 1

Scenario 2

Investment amount (P) = Rs 1,00,000

Investment amount (P) = Rs 1,00,000

Rate of return (R) = 6% per annum

Rate of return (R) = 6% per annum

Investment tenure (N) = 5 years

Investment tenure (N) = 5 years

Compounding frequency (T) = Annual (once a year)

Compounding frequency (T) = Monthly (12 times a year)

Maturity amount (M) = Rs 1,00,000 {(1 + 0.06/1) ^ 5 * 1}

= Rs 1,33,823

Maturity amount (M) = Rs 1,00,000 {(1 + 0.06/12) ^ 5 * 12}

= Rs 1,34,813

Compound interest = Rs 33,823

Compound interest = Rs 34,813

Increased compounding frequency = increased returns = increased corpus

Unlocking monthly compound interest

While monthly compounding can yield a higher corpus, how do you get itVaranasi Wealth Management? The answer is simple – through an investment avenue that allows monthly compounding.

IDFC FIRST Bank Savings Account gives you just that. A rewarding savings account, IDFC FIRST Bank Savings Account allows interest up to 7.25% per annum with the benefit of monthly interest credit to help you grow your Savings Account balance for your financial goals.

To calculate the compound interest on your investments or savings, follow these steps:

Identify the initial amount of money you plan to invest or save.

Find out the annual interest rate offered by your investment or savings account.

Determine how often the interest is compounded (monthly, quarterly, annually, etc.).

Decide the length of time you plan to keep your money invested or saved.

Apply the monthly compound interest formula to calculate the future value of your investment or savings.

You can follow the above-mentioned steps for manual calculation or use the IDFC FIRST Bank savings account interest calculator that provides precise returns over a certain period. The online tool also gives a comparison of interest earnings from a normal savings account and monthly interest credit savings account.

Also read – All you need to know under 3 minutes about IDFC FIRST Bank Saving Account

Discover the benefit of monthly compound interest and understand how it can help you plan for your goals. Make a financial plan listing down your goals, their time horizon and the estimated corpus required for them. Save for your goals in a high-interest savings account which offers a monthly compounding feature, like IDFC FIRST Bank Savings Account. Get monthly interest credits and build up your corpus one credit at a time.

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