What is Compound Interest?
Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. Often called "interest on interest," it makes your money grow at an accelerating rate over time.
Albert Einstein reportedly called compound interest the "eighth wonder of the world" because of its powerful effect on wealth accumulation. The longer your money compounds, the more dramatic the growth becomes.
Compound Interest Formula
Where:
A = Final amount (principal + interest)
P = Principal (initial investment)
r = Annual interest rate (as decimal, e.g., 8% = 0.08)
n = Compounding frequency per year (12 for monthly, 4 for quarterly)
t = Time in years
Compound Interest = A - P
How Compounding Frequency Affects Returns
The more frequently interest is compounded, the higher the effective return:
Yearly compounding: ₹2,15,892
Quarterly compounding: ₹2,19,112
Monthly compounding: ₹2,21,964
Daily compounding: ₹2,22,535
More frequent = Higher returns!
The Rule of 72
A quick way to estimate how long it takes to double your money with compound interest:
Examples:
At 6% → 72/6 = 12 years
At 8% → 72/8 = 9 years
At 10% → 72/10 = 7.2 years
At 12% → 72/12 = 6 years
Compound vs Simple Interest Comparison
- Growth pattern: Simple interest grows linearly; compound interest grows exponentially.
- Calculation: SI = PRT/100; CI uses the more complex exponential formula.
- Time effect: The longer the period, the larger the difference favoring compound interest.
- Example: ₹1,00,000 at 10% for 20 years → SI: ₹3,00,000 vs CI: ₹6,72,750 (yearly).
Benefits of This Calculator
- Multiple frequencies: Compare yearly, quarterly, monthly, and daily compounding.
- Visual breakdown: See principal vs interest in an intuitive chart.
- Real-time updates: Results change instantly as you adjust inputs.
- Accurate calculations: Uses precise compound interest formula.
- Free to use: No registration or app download required.
Frequently Asked Questions
What is the best compounding frequency?
For savers/investors, more frequent compounding is better. Daily compounding gives the highest returns, but the difference from monthly is minimal. For loans, less frequent compounding means you pay less interest.
How does compound interest work on loans?
For loans, compound interest works against you—you pay interest on both principal and accumulated interest. This is why credit card debt can grow rapidly if not paid off monthly.
What is continuous compounding?
Continuous compounding uses the formula A = Pe^(rt), where e is Euler's number (~2.718). It represents infinitely frequent compounding and gives the theoretical maximum return.
Does inflation affect compound interest calculations?
Yes. The "real return" is approximately the nominal interest rate minus inflation. If you earn 8% but inflation is 5%, your real return is about 3%.
How can I maximize compound interest benefits?
Start early (time is the most powerful factor), reinvest all earnings, choose investments with higher rates, and select more frequent compounding when available.
Is compound interest taxable?
Yes, interest earned is typically taxable income. However, some tax-advantaged accounts (like PPF in India or Roth IRA in US) allow tax-free compounding.