Aqid ERPHow compounding works
Interest compounds when each period's interest is added to the balance and itself earns interest in the next. A balance grows by (1 + r ÷ n) each period, where r is the yearly rate and n the number of periods a year, so after t years it is multiplied by (1 + r ÷ n) to the power of n × t. A regular deposit at the end of each period grows the same way for the periods that remain.
The more often interest is added, the more it earns: 12% a year compounded monthly is 1% a month, and twelve of those make 12.68%, not 12%.
A worked example
SAR 10,000 at 5% a year, compounded yearly, for two years; and SAR 500 a month at 6% for ten years with nothing to start.
| 10,000 × 1.05 × 1.05 | 11,025.00 |
|---|---|
| Interest earned | 1,025.00 |
| 500 a month, 120 months deposited | 60,000.00 |
| Grown at 0.5% a month | 81,939.67 |
Reading the result
The calculator shows what the balance comes to, what was put in over the period, and the difference — the growth. It is the arithmetic of a savings account, a loan or a projection; it says nothing about which product is permissible or wise. The sums are done in fixed point at twelve decimal places, so a thirty-year monthly schedule carries no rounding drift.