What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest — which only applies to the original principal — compound interest grows exponentially over time because you earn interest on your interest.
The formula is: A = P multiplied by (1 plus r/n) to the power of (n multiplied by t), where P is principal, r is annual interest rate, n is compounding frequency per year, and t is time in years.
How compounding frequency affects growth
The more frequently interest is compounded, the faster your money grows. Rs 100,000 at 12 percent for 10 years: annually gives Rs 310,585 — monthly gives Rs 330,039. The difference grows larger over longer periods.
Compound interest in Pakistan and India
Pakistani savings accounts typically offer 12 to 15 percent annual profit. National Savings Schemes offer competitive rates with government backing. Indian savings accounts average 3 to 7 percent. Fixed deposits in both countries typically compound quarterly or annually.
Frequently Asked Questions
How does compound interest differ from simple interest? Simple interest: Rs 100,000 at 10 percent for 3 years earns Rs 30,000 interest. Compound interest annually: Rs 33,100 interest. The gap grows with time and higher rates.
What is CAGR? Compound Annual Growth Rate is the annualised rate of return that accounts for compounding. It is the standard way to compare investments of different durations.
Does compound interest work against me for loans? Yes. Credit cards and many loans use compound interest, which is why debt grows faster than expected. Paying more than the minimum each month significantly reduces total interest paid.
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