What Is Compound Interest & How Does It Work?
Compound interest is often called the 'eighth wonder of the world' — those who understand it earn it, those who don't, pay it. It's the concept of earning interest on your interest.
Simple vs Compound Interest
Simple interest is calculated only on the principal. If you invest ₹1 lakh at 10% simple interest, you earn ₹10,000 every year. With compound interest, you earn interest on accumulated interest too — ₹10,000 in year 1, ₹11,000 in year 2, ₹12,100 in year 3, and so on.
The Power of Compounding
₹1 lakh invested at 12% for 30 years grows to ₹30 lakh with compounding vs ₹4.6 lakh with simple interest. The longer you stay invested, the more powerful compounding becomes. This is why starting early matters so much.
Rule of 72
Divide 72 by your interest rate to find how many years it takes to double your money. At 8% = 9 years. At 12% = 6 years. At 15% = 4.8 years.
How to Maximize Compound Interest
1) Start investing as early as possible. 2) Reinvest returns instead of withdrawing. 3) Increase investment amount annually. 4) Choose investments with higher compounding frequency. 5) Stay invested for the long term.