Reinvestment of earnings at the same rate of return to grow the principal amount every year is compounding. Compounding is a compelling concept. It is because the interest of your invested money is also earning interest. This is known as compound interest. The value of the investment keeps growing at a geometric rate (always increasing) rather than at an arithmetic rate (straight-line). Reinvestment of earnings at the same compound interest rate of return would help in continually growing the principal amount year-on-year.

When the principal includes the accumulated interest of the previous periods and interest is calculated on this then they say its compound interest. This powerful tool (compound interest) can be used by investors to plan their financial goals. In the long term, this technique will benefit the investor. Longer, the investment horizon higher are the returns. The right advice is to start saving regularly and invest wisely. An early start would give the investor a higher compounding effect, and building wealth becomes easy. The possibilities of the compound interest are endless. With time, compound interest only further enhances the earnings, and the investment grows manifold.

Compound interest can be calculated by:

• Daily compounding
• Monthly compounding
• Quarterly compounding
• Half-yearly compounding
• Yearly compounding

Compounding is done on loans, deposits and investments. Frequency of compounding is basically the number of times the interest is calculated in a year. The higher the frequency of compounding, the greater the amount of compound interest. The frequency of compounding depends on the instrument. A credit card loan is usually compounded monthly and a savings bank account is compounded daily. The frequency of compounding varies based on the scheme offered by the bank or financial institutions.

One doesn't have to be a financial analyst to understand the concept of compounding. To make the maximum advantage of the compound interest, invest a small amount regularly for long periods of time. Use the compound interest calculator to see how the magic unfolds with time. Compounding is a technique that makes money work harder. An average investor depends on this tool to plan for their financial goals. Most long term financial goals become easier and achievable because of the power of compounding .

For example, INR 100 is invested, and the compound interest rate is 6% p.a. The principal amount is INR 100, and the interest earned at the end of 1 year is INR 6 (6% of INR 100). Instead of withdrawing the interest amount, it is reinvested, then the principal amount for the second year becomes INR 106 (INR 100 + INR 6). The interest earned for the second year is INR 6.36, this is 0.36 more than the previous year. Even though the amounts look very small, it makes a huge difference in the long term. The magic of compounding works only over long periods of time.

Compounding is when the returns earned from an investment are reinvested to generate additional earnings over time. In short, compounding is Interest on Interest, hence magnifying the returns over time. The power of compounding uses this concept to estimate the value of an investment.Power of Compounding calculator is a tool that will help in calculating the worth of an investment. It calculates the value of an investment after 'n' number of years at a specified interest rate. The power of compounding calculator uses compound interest formula as a basis. The entire concept of compound interest revolves around making high returns by adding the interest earned to the principal amount at the compound interest rate.

The compound interest formula used in the power of compounding calculator is P [((1 + i)^n) – 1], where P is the principal, I is the annual interest, and n is the number of periods.The calculator helps in understanding how much an individual will earn if they invest a fixed amount for a fixed period at a given annual rate of interest. By using this calculator, one can calculate the potential returns from an investment. They can find out how much their savings will grow if invested. The calculator has the following components:

• Principal Amount: It is the amount one intends to invest.
• Coumpounding Interval: It is the interval of compounding.
• Investment Period: It is the number of years one wants to invest.
• Rate of Return: It is the interest one expects to earn from the investment.