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Compound Interest Tricks: Handy Shortcuts and Tips for Compound Interest

Compound interest is a common type of interest levied on a majority of financial instruments, including loans and investments. Read on to find out the easy simple and compound interest formulas and tricks.

Compound interest and simple interest are the two popular types of interest that come into the picture when talking about any kind of financial instrument, be it stock market investment instruments like mutual funds and shares or loans.
 

While simple interest is simple and can be calculated easily, compound interest is a bit tricky. However, the deal is that compound interest is highly beneficial for investors as it offers them a chance to maximise their returns over time through the concept of the “power of compounding.”
 

Most people find the calculation of compound interest challenging. Here is the good news: there are some amazing short tricks and formulas that can help you calculate compound interest quickly, even without using a compound interest calculator.
 

Whether you are planning to invest or simply want to learn about the easy ways of calculating compound interest, we have got you covered.
 

In this blog, we will discuss the most useful compound interest tips and tricks.
 

Keep reading!
 

What is Compound Interest?

Compound interest is defined as the method of calculating interest levied on a loan or an investment. It is calculated on the principal amount as well as the interest gained on it during the previous cycles. Some people also call it the calculation of interest on gained interest. It is represented by C.I. 

Formula for Compound Interest 

As mentioned in the above paragraph, compound interest is calculated on the initial amount and the interest accumulated on it previously. Based on it, here is the formula for calculating C.I:
 

Compound Interest = Amount - Principal
 

In the above formula, the amount is derived by the below formula:
 

A = P (1+ r/n)nt

Here,
 

  • A = Total Amount
  • P = Initial Principal
  • r = Rate of interest on which loan or deposit is disbursed.
  • n = number of times the interest is compounded in a year. It can be monthly, half-yearly, quarterly, or yearly.
  • t = time in years.

We can also write it as:

C.I = A - P

Or

C.I = P ( 1+ r/n)nt - P

In case the interest is compounded only once per year, the formula becomes:

A = P (1 + R/100)t

Best Compound Interest Tips and Tricks 

Now that you have understood the concept of compound interest and the formula for calculating the same, let’s move on to the shortcut to find compound interest:
 

Compound Interest Tricks 1:

If a sum of money subject to compound interest becomes x times in ‘a’ years and y times in ‘b’ years, then both of these sums can be related using the below shortcut formula:
 

(X)1/a = (Y)1/b

Let’s derive this shortcut from the main formula.

A = P (1 + r/100)t

Taking condition 1, the sum becomes x times in ‘a’ year and y times in ‘b’ year. Thus, using the compound interest formula,

xp = p(1 + r/100)a

(X)1/a= (1 + r/100)………………………….(equation I)

In the same way, taking the next condition, the sum becomes y times in ‘b’ year, it becomes:

yp = p(1 + r/100)b

(Y)1/b = (1 + r/100)………………………….(equation II)

On dividing equation I by II, we get:

(X)1/a = (Y)1/b
 

Let’s now use this trick to solve an example.

Example 1: A sum of money subjected to compound interest becomes 4 times in 4 years. In how many years will it become 16 times itself?
 

Solution: By using (X)1/a = (Y)1/b

(4)1/4  = (16)1/x

(4)1/4  = (4)2/x

1/4 = 2/x

X = 8
 

Compound Interest Tricks 2:

If an amount grows up to X rupees in T years and Y in (T+1) years subject to compound interest, then the percent of rate can be calculated as:
 

R% = (Y - X )/ X * 100

Example 2: If an amount of money grows up to ₹5,000 in 4 years and up to ₹7,000 in 7 years, find the rate percent.

Solution: Here,

X = 4

Y = 7

R% = (7- 4) / 4 * 100

R% = 3 / 4 * 100%

R% = 75%

Some Other Important Tips and Formulas for Compound Interest 

Following are some other direct formulas you can use to solve various kinds of compound interest problems:
 

  • Always calculate the compound interest on the Amount, i.e. (Principal + Interest).
  • Always calculate the simple interest on the Principal.
  • If a sum A is compounded annually becomes A1 in t years and A2 in (t+1) years, then the principal can be calculated using:
  • P = A1 (A1/A2)t
  • In two years, the difference between compound interest and simple interest can be calculated using:
  • P x (R)2/ (100)2
  • In three years, the difference between compound interest and simple interest can be calculated using:
  • [P x (R)2 / (100)2 ] x [300 + R/ 100]

Final Words

Compound interest is very fruitful for investors as it allows them to make the maximum returns out of their long-term investments. As time passes, the amount gets bigger due to the power of compounding.

However, when it comes to calculating the C.I., things tend to get dicey because of complex and time-consuming formulas and methods.

But say no more!
 

We have discussed some of the best compound interest tips and tricks using which you can solve any compound interest problem in minutes.

If you are still struggling with C.I. calculations, try using the Tata AIA compound interest calculator. It will surely help you save a lot of time and effort.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Do compound interest short tricks offer accurate results?

Since compound interest tricks are derived from the main formulas, they offer accurate results most of the time, provided they are used correctly.

Actual formula vs short tricks: What is the best way to learn compound interest calculations?

Compound interest tricks and tips are nothing but the simple derivations of the main formulas. While the tricks can help you save time and avoid lengthy and complex methods, the main formulas help you understand the concept better.

 So, it is advisable to clear your basic concepts by understanding formulas and then applying short tricks to derive the results in a speedy manner.

However, there is one thing to remember: practice is the key to learning any mathematical concept. So, practice as much as you can, regardless of the methods you are using.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication. However, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.