Compound Interest
Watch your money snowball — interest earning interest over time.
A = P �— (1 + r/n)^(nt) — interest is calculated on your growing balance each period, not just the original amount. The more frequent the compounding, the higher the effective return.Compound interest formula
A = P �— (1 + r/n)^(nt), where P is principal, r is annual interest rate, n is compounding frequency per year, and t is time in years. The key insight: interest earned in each period itself earns interest in the next period — this is what creates exponential growth.
Monthly vs annual compounding
More frequent compounding always yields more. At 10% annual rate: yearly compounding gives 10% effective yield, quarterly gives 10.38%, monthly gives 10.47%, and daily gives 10.52%. Most Indian savings accounts and FDs compound quarterly. PPF compounds annually.
The Rule of 72
Divide 72 by your interest rate to find how many years it takes to double your money. At 8%: 72/8 = 9 years. At 12%: 72/12 = 6 years. At 6%: 72/6 = 12 years. This rule works because of compounding — with simple interest, doubling takes exactly 100/rate years, much longer.