Last updated: October 2026 Β· 3 min read
Albert Einstein is often (probably wrongly) quoted as calling compound interest the eighth wonder of the world. Whoever said it, the idea is powerful: your money earns returns, and those returns earn returns too.
Simple vs compound interest
| Year | Simple interest on βΉ1 lakh at 10% | Compound interest on βΉ1 lakh at 10% |
|---|---|---|
| 1 | βΉ1,10,000 | βΉ1,10,000 |
| 5 | βΉ1,50,000 | βΉ1,61,051 |
| 10 | βΉ2,00,000 | βΉ2,59,374 |
| 20 | βΉ3,00,000 | βΉ6,72,750 |
| 30 | βΉ4,00,000 | βΉ17,44,940 |
The formula
A = P Γ (1 + r/n)nΓt, where P is the principal, r the annual rate, n the number of compounding periods per year and t the number of years. For yearly compounding, A = P Γ (1 + r)t.The Rule of 72
Divide 72 by the annual return to estimate how many years it takes money to double. At 8%, money doubles in about 9 years; at 12%, about 6 years; at 6%, about 12 years.
Why starting early matters
Asha invests βΉ5,000 a month from age 25 to 35 (10 years) and then stops. Rohan invests βΉ5,000 a month from 35 to 60 (25 years). At an assumed 10% annual return, Asha’s money keeps compounding and at 60 is larger than Rohan’s (roughly βΉ1.1 crore vs βΉ67 lakh), despite investing less than half as much. Time in the market is the biggest lever.
Compounding can work against you
Credit card debt at 36-42% a year compounds fast. A βΉ50,000 unpaid balance can roughly double in about two years if only minimum payments are made. Pay high-interest debt first.
How to use compounding
- Start investing as early as possible, even small amounts.
- Reinvest dividends and interest (growth options).
- Avoid breaking long-term investments.
- Increase SIPs as income grows (step-up).
- Keep costs low: expense ratios and fees reduce compounding.
Frequently asked questions
What is compounding frequency?
How often interest is added: yearly, half-yearly, quarterly or monthly. More frequent compounding gives slightly higher returns.
Does PPF compound?
Yes. PPF interest is calculated monthly and compounded annually.
What is CAGR?
Compound Annual Growth Rate: the steady yearly rate at which an investment would grow from its start value to its end value.
Keep exploring
This article is for general information, not financial, tax or legal advice. Rates, limits and rules change; always confirm on the official website or with a qualified advisor before you act. Spotted something that needs updating? Let us know.
