Investing • Compounding • Growth

Compound Interest

See the magic of compounding on your savings.

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Compound Interest Quick Guide

Compound interest is "interest on interest"—your investment grows exponentially, not linearly. Formula: A = P(1 + r/n)^(nt) where A = final amount, P = principal, r = annual rate, n = compounds per year, t = years. Example: ₹1L at 10% annually for 10 years = ₹2.59L (vs simple interest = ₹2L). Time and frequency are your greatest assets.

Compound vs Simple Interest

Simple: ₹10K at 10% = ₹20K (after 10 years)

Compound (annual): ₹10K at 10% = ₹25.9K (after 10 years). Compound wins by ₹5.9K!

Rule of 72 (Quick Check)

Divide 72 by annual rate to find doubling time:

  • 6% rate → 72÷6 = 12 years to double
  • 10% rate → 72÷10 = 7.2 years to double

Key Strategies

Frequently Asked Questions

How is compound interest different from simple interest?

Simple: Interest = P × r × t (only on principal). Example: ₹10,000 at 10% for 10 years = ₹10,000 interest (total ₹20,000). Compound interest earns on both principal AND accumulated interest. Example: ₹10,000 at 10% (annual) for 10 years = ₹15,937 interest (total ₹25,937). Compound is 60% higher! More frequent compounding (daily vs annual) increases the difference. This is why starting early matters—compound growth becomes exponential over decades.

How does inflation affect compound interest returns?

Your investment grows nominally (in rupees) but inflation erodes purchasing power. Example: ₹1L at 1% APY with 3% inflation = you actually LOSE 2% buying power yearly. Over 20 years, ₹1L nominally becomes ₹1.22L, but inflation-adjusted: only ₹55K in today's money = 45% loss! Stock markets (8-10% long-term) beat inflation; bonds (4-5%) barely keep pace. Rule: 4% return + 3% inflation = only 1% real return. Young investors: prioritize stocks for real wealth. Older: bonds acceptable for stability.

Does paying debt or investing win with compound interest?

Depends on debt rate: Credit card (18%): Pay immediately—compounds faster than you can invest. Car/personal loan (8-10%): Weigh against 8-10% stock returns. Often a toss-up; prioritize based on comfort. Mortgage/education loan (3-6%): Invest instead—stock market historically beats these rates. A 3% mortgage + 8% stock gains = net 5% profit. Strategy: (1) Always pay minimums on time. (2) Aggressively pay high-interest debt. (3) For low-rate debt, invest for long-term growth. Most people win by investing 20+ years for compound growth rather than paying low-rate debt early.