"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." — (attributed, probably wrongly, to Einstein)
Whether or not Einstein said it, the underlying point is correct. Almost every financial decision — savings, loans, investments, retirement — is governed by the compound-interest formula in some form. Here's how it works.
Open the Compound Interest Calculator and run your scenarios.
The formula
A = P × (1 + r/n)^(n×t)
where:
A= final amountP= principal (initial investment)r= annual interest rate (decimal — 12% = 0.12)n= compounding periods per yeart= time in years
Compounding frequency moves the needle
₹1,00,000 at 10% for 10 years:
| Compounding | Final amount |
|---|---|
| Annually (n=1) | ₹2,59,374 |
| Semi-annually (n=2) | ₹2,65,330 |
| Quarterly (n=4) | ₹2,68,506 |
| Monthly (n=12) | ₹2,70,704 |
| Daily (n=365) | ₹2,71,791 |
| Continuously (limit) | ₹2,71,828 |
The jump from annual → quarterly is meaningful (₹9k extra). The jump from monthly → daily is tiny (₹1k). Beyond daily, you've hit the asymptotic limit of e^(r×t) — the famous mathematical constant e shows up here naturally.
The Rule of 72
To estimate how long money takes to double at a given rate, divide 72 by the rate:
| Rate | Doubles in |
|---|---|
| 4% | 18 years |
| 6% | 12 years |
| 8% | 9 years |
| 12% | 6 years |
| 18% | 4 years |
Useful for mental math on car loans (12% double in 6 years means your interest alone could equal the car price if the loan stretched that long), credit cards (36% double in 2 years — that's why credit-card debt destroys finances), and equity returns.
What separates simple from compound interest
Simple interest earns interest only on the principal:
A = P × (1 + r × t)
₹100,000 at 10% simple for 10 years = ₹200,000. Compound version = ₹259,374. The gap (~₹60k) is the compounding magic — interest earning interest.
For very short periods (a few months), the difference is negligible. For 10+ years, it's transformative.
Where compounding lives in your life
- For you: SIPs, lumpsums, FDs, PPF, NPS, savings accounts (yes, even savings).
- Against you: credit cards, EMIs (the math is the same compound formula, just paid to the bank).
The most important investment habit is consistency with time, because the compound formula multiplies them. CalcMaster's SIP calculator is essentially this formula iterated for monthly contributions.
Run yours
Open the Compound Interest Calculator. Try moving just the time slider while keeping rate constant — see what 10 years vs 30 years does to the same monthly contribution. That's the lesson.
