Compound Interest
Learn how compound interest can accelerate your wealth growth over time.
The Eighth Wonder of the World
Albert Einstein reportedly called compound interest "the eighth wonder of the world," saying, "He who understands it, earns it; he who doesn't, pays it."
What is Compound Interest?
Compound interest is the interest calculated on the initial principal and also on the accumulated interest over previous periods. Unlike simple interest, you earn interest on your interest.
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (in decimal form)
- n = Number of times interest is compounded per year
- t = Time in years
The Power of Compounding
Consider an investment of ₹10,000 with a 10% annual return:
- After 1 year: ₹11,000
- After 10 years: ₹25,937
- After 30 years: ₹1,74,494
The same ₹10,000 grows to nearly 17.5× its original value over 30 years — purely from compounding.
The Snowball Effect
Think of compound interest like a snowball rolling downhill. It starts small, but picks up more snow as it goes, growing larger and faster. The longer it rolls, the bigger it gets. Time is the hill — the longer you give your money to roll, the bigger the snowball.
Compounding Frequency Matters
Interest can compound annually, quarterly, monthly, or even daily. More frequent compounding leads to slightly higher returns:
- Annual compounding on ₹10,000 at 10%: ₹11,000 after year 1
- Monthly compounding on ₹10,000 at 10%: ₹11,047 after year 1
- Daily compounding on ₹10,000 at 10%: ₹11,052 after year 1