What is Compound Interest?
Compound interest is interest on interest. Unlike simple interest which is calculated only on the principal, compound interest is calculated on the principal plus all accumulated interest.
Compound Interest Formula
A = P × (1 + r/n)^(n×t)
Where:
- A = Final amount
- P = Principal
- r = Annual interest rate (decimal)
- n = Compounding frequency per year
- t = Time in years
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Einstein's Quote
"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." - Albert Einstein
Simple vs Compound Interest
| ₹1 Lakh at 10% for: | Simple Interest | Compound Interest |
|---|---|---|
| 5 years | ₹1.50 L | ₹1.61 L |
| 10 years | ₹2.00 L | ₹2.59 L |
| 20 years | ₹3.00 L | ₹6.73 L |
| 30 years | ₹4.00 L | ₹17.45 L |
Rule of 72
The Rule of 72 is a quick way to estimate how long it takes for money to double. Simply divide 72 by the interest rate.
- At 6% → 72/6 = 12 years to double
- At 8% → 72/8 = 9 years to double
- At 12% → 72/12 = 6 years to double