| Principal Amount | Interest | Total Amount |
|---|---|---|
| ₹ 1,00,000 | ₹ 0 | ₹ 1,00,000 |
Compound interest refers to the interest earned on both the principal amount and the accumulated interest of an investment or loan. Unlike simple interest, where interest is only earned on the principal amount, compound interest results in the exponential growth of an investment or debt over time. The formula for compound interest is: A = P(1 + r/n)^(nt) Where: A = the total amount of money after n years, including interest P = the principal amount (initial investment or loan amount) r = the annual interest rate (as a decimal) n = the number of times interest is compounded per year t = the number of years the money is invested or borrowed.
Simple interest is calculated only on the principal amount of an investment or loan, while compound interest is calculated on both the principal and the interest earned. As a result, compound interest grows more quickly than simple interest.
The frequency of compound interest calculation depends on the terms of the investment or loan. It can be compounded annually, semi-annually, quarterly, monthly, or even daily.
Compound interest can be beneficial if you are earning it on an investment, as it allows your money to grow faster over time. However, if you are paying compound interest on a loan or credit card balance, it can be detrimental, as the interest charges will accumulate and make it more difficult to pay off the debt.
The power of compound interest lies in the fact that it enables investments to grow exponentially over time. Even small amounts of money, if invested wisely and given enough time, can turn into significant sums due to the compounding effect of interest.
To take advantage of compound interest, it's important to start saving and investing early, and to make regular contributions to your investment accounts. Choosing investments that offer compound interest, such as mutual funds or exchange-traded funds (ETFs), can also help your money grow more quickly.