How compound interest helps grow your savings over time
What's the story
If you want to grow your savings and investments, knowing about compound interest is a must.
Unlike simple interest, which is calculated on the principal amount alone, compound interest grows on the initial principal and the accumulated interest from previous periods.
In short, your money grows at an accelerating rate with time.
Time factor
The power of time
The longer you keep your money invested, the more you benefit from compound interest.
Even small sums can grow significantly over time, provided you don't touch them.
For example, investing ₹1,00,000 at an annual compound interest rate of 5% will grow to roughly ₹1,62,889 in 10 years.
The key takeaway: Start investing early to reap the maximum benefits of compounding.
Compounding frequency
Frequency matters
The frequency at which interest is compounded impacts what you earn.
Interest can be compounded annually, semi-annually, quarterly, or even daily.
More frequent compounding means higher returns since every compounding period adds more to the principal amount sooner.
For instance, a ₹1,00,000 investment at 5% annual interest compounded monthly will yield more than if it were compounded annually.
Interest rate influence
Rate of return impact
The rate of return is also critical for determining how fast your investment grows through compounding.
The higher the rate, the faster the growth and the bigger the returns over time.
For instance, if you double the annual return from 4-8%, the future value increases exponentially because of the compounding effect in calculations.
Quick estimation tool
Rule of 72 simplified
The Rule of 72 provides a quick way to estimate how long it takes for an investment to double, assuming a fixed annual rate of return.
One divides 72 by that rate percentage number.
For instance, an 8% return per year means 72 divided by eight would equal nine years.
This rule gives a quick insight into growth timelines without complex calculations.
Initial investment
Start small but think big
Starting with even modest amounts lets you benefit from compounding's power over long periods.
Frequent contributions improve overall outcomes greatly when combined with strategic planning around rates and frequencies discussed in earlier sections above.
This is why starting today matters the most, irrespective of what the current financial situation looks like today.