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Compound interest earns returns on both the original principal and the accumulated interest from previous periods. The formula is A = P × (1 + r/n)nt, where P is the principal, r is the annual interest rate (decimal), n is compounding frequency per year, and t is time in years. The final interest earned is A − P.
The compounding frequency makes a measurable difference: $10,000 at 8% for 10 years yields $21,589 compounded annually, $21,911 monthly, and $21,980 daily. More frequent compounding always produces more. A useful mental shortcut is the Rule of 72: divide 72 by the annual interest rate to estimate years to double your money — at 8%, money doubles in ~9 years; at 12%, in ~6 years. Compound interest is the core engine behind savings accounts, fixed deposits, mutual funds, and debt. Understanding it helps you choose higher-frequency compounding options and start investing as early as possible, since time is the most powerful variable.
Compound interest is interest calculated on both the initial principal and the interest accumulated from prior periods. Unlike simple interest (which only earns on the principal), compound interest grows exponentially over time.
More frequent compounding means more interest-on-interest cycles per year, leading to higher final amounts. Daily compounding yields slightly more than monthly, which yields more than annual — the difference widens over longer periods.
The Rule of 72 is a quick mental formula to estimate how long it takes for an investment to double. Divide 72 by the annual interest rate: at 6% it doubles in 12 years, at 9% in 8 years, at 12% in 6 years.
Simple interest is calculated only on the principal: Interest = P × r × t. Compound interest also earns on accumulated interest. Over long periods, compound interest grows far more than simple interest on the same principal.