What is Compound Interest?
Compound Interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It is often described as "interest on interest".
The Power of Compounding
Compounding can grow your investments exponentially over time because you earn interest not just on your initial money, but also on the interest that money has already earned.
Formula
The formula for compound interest is:
A = P (1 + r/n)^(nt)
- A = Final Amount
- P = Principal Amount
- r = Annual Interest Rate (decimal)
- n = Number of times interest compounded per year
- t = Time in years
Example
Invest ₹10,000 at 10% annually for 5 years:
- Simple Interest Return: ₹5,000 (Total ₹15,000)
- Compound Interest Return: ~₹6,105 (Total ₹16,105)