Compound Interest

What is compound interest?

Compound interest is the interest earned on both the principal amount and on the accumulated interest from previous periods. In other words, it is the interest that you earn on your interest. This means that your money grows at a faster rate over time, due to the compounding effect.

Compound Interest Formula

The compound interest formula is:

A=P(1+r/n)^nt

Where:

A is the future value of the investment/loan, including interest.
P is the principal amount (initial investment/loan amount).
r is the annual interest rate (decimal).
n is the number of times that interest is compounded per year.
t is the number of years the money is invested/borrowed for.

This formula calculates the future value of an investment or loan that compounds interest over time.

How does compound interest work?

Imagine you invest ₹100 in a savings account that earns 10% interest per year. At the end of the first year, you will have earned ₹10 in interest, for a total of ₹110. In the second year, you will earn interest not only on the original ₹100, but also on the INR 10 you earned in interest in the first year. This means that you will earn ₹11 in interest in the second year, for a total of ₹121.

How can I take advantage of compound interest?

  • Investing in stocks, bonds, and other assets: Stocks, bonds, and other assets have the potential to earn a higher rate of return than savings accounts, which can further accelerate the growth of your money.
  • Using a compounding calculator: There are many compounding calculators available online that can help you see how much your money can grow over time.

The power of compound interest

Compound interest is a powerful force that can help you achieve your financial goals. By taking advantage of compound interest, you can grow your money faster and reach your financial objectives sooner.

Here is an example of how compound interest can work over time:

Invest ₹100 at 10% interest for 10 years: Your investment will grow to ₹259.37.

Invest ₹100 at 10% interest for 20 years: Your investment will grow to ₹672.73.

Invest ₹100 at 10% interest for 30 years: Your investment will grow to ₹1,744.94.

As you can see, the longer you invest your money, the more it will grow due to compound interest.

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