Compound interest is interest calculated on both the initial principal and accumulated interest from previous periods. Unlike simple interest (calculated only on principal), compound interest grows exponentially. Formula: A = P(1 + r/n)^(nt) where P = principal, r = annual rate, n = compounding frequency, t = years.
How does compounding frequency affect returns?+
More frequent compounding yields higher returns. For ₹1,00,000 at 10% for 5 years: Annual compounding = ₹1,61,051, Monthly = ₹1,64,530, Daily = ₹1,64,861. The difference grows significantly with larger amounts and longer time periods.
What is the Rule of 72?+
The Rule of 72 estimates how long it takes to double your money: Years to Double = 72 / Annual Interest Rate. At 8% interest, money doubles in ~9 years. At 12%, it doubles in ~6 years. This is a quick mental math shortcut for compound interest.
How does compound interest compare to simple interest?+
Simple interest: Interest = P × r × t (linear growth). Compound interest: A = P(1+r/n)^(nt) (exponential growth). Over 20 years at 10%, ₹1 lakh grows to ₹3L with simple interest but ₹6.73L with annual compounding — more than double!