How To Shift Between Simple And Compound Interest Rates

Now that banks and other financial institutions are having to compete to raise deposits from the public,quite a few are resorting to a bit of window dressing.They quote annual yields,annualized returns or simple interest rates instead of compound interest rates for multi-year deposits.

Now a simple interest rate looks more impressive than a compound interest rate over longer periods of time ;so do check what sort of interest the seller is offering before locking your money away at a rate that looks great.

Here is a simple step-by-step way  that you can use to mentally estimate the compound interest rate that is equal to any simple interest rate.

1.Assume you are investing 10,000 rupees

2.Now calculate how much you will make in a year given the simple interest rate,say 10.5% percent.In this case it is 1050 rupees.

3.Next calculate how many year’s interest will equal the initial deposit of 10,000 rupees.In other words, we need to calculate how fast our money will double.In this case the answer is 9.52 years.

4.Remember the rule of 72?You can read about it here: https://wealthymatters.com/2011/01/26/rule-of-72-rule-of-70-rule-of-69/ if you’re joining late or need to refresh your memory.Simply put. the rule says 72 divided by the time to double the money gives a approximation of the compound interest rate.So, divide 72 by the time period you get in step 3 to get the equivalent compound interest rate.In this case the answer is 7.56%.Not so impressive is it?

Of course you can omit decimals for ease of calculation with a small loss of accuracy.Believe me, banks would love to discourage you from attempting this simple math by forcing you to do more complicated calculations.Also remember your mobile/tablet etc.has a calculator and banks do have them.Reach for one if you have to and do the math.Sometimes just asking the banker doesn’t work.

BTW if the tenure is for some weird term like 555 days/999 days etc.Don’t get confused.Forget about the tenure,consider the rate is for one year and follow the same steps.