📏 Rule of 72: At 8% interest, your money doubles in approximately 9 years.
What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (calculated only on the principal), compound interest grows exponentially over time — this is why Albert Einstein allegedly called it the "eighth wonder of the world."
Whether you're saving in a bank fixed deposit, investing in mutual funds through SIPs, or growing a retirement corpus, compound interest is the engine that multiplies your wealth.
The Compound Interest Formula
Standard Compound Interest Formula:
A = P × (1 + r/n)n×t
- A
- = Final amount (principal + interest)
- P
- = Initial principal (starting amount)
- r
- = Annual interest rate (as decimal)
- n
- = Compounding frequency per year
- t
- = Time period in years
Compound Interest vs. Simple Interest
| Feature | Compound Interest | Simple Interest |
|---|---|---|
| Interest on | Principal + accumulated interest | Principal only |
| Growth pattern | Exponential (accelerating) | Linear (constant) |
| ₹1L at 10% for 20 years | ₹6,72,750 | ₹3,00,000 |
| $10K at 8% for 30 years | $100,627 | $34,000 |
| Best for | Long-term investments, SIPs, mutual funds | Short-term loans, car loans |
How Compounding Frequency Affects Your Returns
The more frequently interest is compounded, the more you earn. Here's a comparison for a ₹1,00,000 investment at 10% for 10 years:
| Frequency | Final Amount | Interest Earned |
|---|---|---|
| Annual (n=1) | ₹2,59,374 | ₹1,59,374 |
| Quarterly (n=4) | ₹2,68,506 | ₹1,68,506 |
| Monthly (n=12) | ₹2,70,704 | ₹1,70,704 |
| Daily (n=365) | ₹2,71,791 | ₹1,71,791 |
The Rule of 72: A Quick Mental Math Trick
The Rule of 72 is the fastest way to estimate how long it takes to double your money. Simply divide 72 by the annual interest rate:
Years to double ≈ 72 ÷ Interest Rate
Compound Interest in Real-World Investments
Compound interest powers virtually every investment vehicle:
- Mutual Fund SIPs: Monthly investments compound over time. Use our SIP Calculator to see the effect of step-up compounding.
- Fixed Deposits (FDs): Banks compound quarterly. An 8% FD actually yields 8.24% effective annual return.
- PPF (Public Provident Fund): Compounds annually at government-set rates (currently 7.1% in India).
- Stock Market: Reinvested dividends compound over decades, which is why long-term equity investors dramatically outperform short-term traders.
Ready to Plan Your SIP?
Compound interest is even more powerful when combined with regular monthly investments (SIPs). Our free calculator models step-up SIP with built-in SWP retirement planning.
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