What is Compound Interest? Formula, Meaning & Examples
Compound Interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. In simple terms, it is interest on interest, which helps your money grow faster over time.
Simple Definition
Compound Interest Formula
The standard formula is:
- A = Final Amount
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- n = Number of times interest is compounded per year
- t = Time (in years)
How Compound Interest Works
- You invest a principal amount
- Interest is added at regular intervals
- Next interest is calculated on total (principal + interest)
- This process repeats, increasing growth
Example
Principal: ₹10,000
Rate: 10% per year
Time: 2 years
- Year 1: 10,000 × 10% = 1,000 → Total = 11,000
- Year 2: 11,000 × 10% = 1,100 → Total = 12,100
- Final Amount = ₹12,100
Compound Interest vs Simple Interest
| Feature | Compound Interest | Simple Interest |
|---|---|---|
| Interest On | Principal + Interest | Principal only |
| Growth | Faster | Slower |
| Best For | Investments | Short-term loans |
Why Compound Interest is Powerful
- Helps money grow exponentially
- Great for long-term investments
- Used in savings accounts, FD, mutual funds
- Encourages early investing
Use Compound Interest Calculator
Instead of manual calculation, use our tool for quick and accurate results:
Conclusion
Compound interest is a powerful concept that helps your money grow over time. The earlier you start investing, the more benefit you gain from compounding.
About this Calculator
Learn what compound interest is, how it works, its formula, and examples. Understand how your money grows with compounding.