What Is Compound Interest?
Compound interest is interest calculated on both the initial principal AND the accumulated interest from previous periods. This "interest on interest" effect creates exponential growth over time — which Albert Einstein reportedly called "the eighth wonder of the world."
Compound Interest Formula
A = P × (1 + r/n)^(n×t)
Where: P = Principal | r = Annual rate | n = Compounding periods/year | t = Time in years
Where: P = Principal | r = Annual rate | n = Compounding periods/year | t = Time in years
Power of Compounding: ₹1 Lakh Example
| Years | At 8% | At 12% | At 15% |
|---|---|---|---|
| 5 | ₹1,47,000 | ₹1,76,000 | ₹2,01,000 |
| 10 | ₹2,16,000 | ₹3,11,000 | ₹4,05,000 |
| 20 | ₹4,66,000 | ₹9,65,000 | ₹16,37,000 |
| 30 | ₹10,06,000 | ₹29,96,000 | ₹66,21,000 |
Compounding Frequency Effect (₹1L at 12%, 10 years)
- Annual: ₹3,10,585
- Quarterly: ₹3,26,204 (+₹15,619 more)
- Monthly: ₹3,30,039 (+₹19,454 more)
- Daily: ₹3,32,000 (+₹21,415 more)
Start early: Investing ₹1,000/month from age 25 at 12% return gives ₹3.5 crore by 60. Starting at 35 gives only ₹1.0 crore — a 3.5× difference for just 10 years' headstart.