Compound interest is often called the most powerful force in personal finance. It means earning returns not only on your original money but also on the returns you have already earned. This guide explains the compound interest formula in plain English, with worked examples you can repeat in our free Compound Interest Calculator.
Simple vs compound interest
With simple interest, you earn the same amount every year, based only on the original amount. Rs 100,000 at 10% earns Rs 10,000 a year, so after 5 years you have Rs 150,000.
With compound interest, each year’s interest is added to the balance and earns interest too. After 5 years at 10% compounded yearly, Rs 100,000 grows to Rs 161,051. The extra Rs 11,051 is interest on interest.
The formula
A = P × (1 + r ÷ n)^(n × t)
- A = final amount
- P = starting amount (principal)
- r = yearly rate as a decimal (10% = 0.10)
- n = times interest is added per year (12 for monthly)
- t = number of years
Step-by-step example
Rs 500,000 at 12% a year, compounded monthly, for 3 years.
- r ÷ n = 0.12 ÷ 12 = 0.01
- n × t = 12 × 3 = 36
- (1.01)^36 ≈ 1.4308
- A = 500,000 × 1.4308 ≈ Rs 715,400
Total interest ≈ Rs 215,400.
Compounding frequency
| Rs 100,000 at 12% for 5 years | Final amount |
|---|---|
| Yearly | Rs 176,234 |
| Quarterly | Rs 180,611 |
| Monthly | Rs 181,670 |
More frequent compounding helps, but the rate and time matter far more.
Adding monthly deposits
Most people save every month rather than once. The calculator adds a regular deposit to the formula. Rs 10,000 a month at 10% for 10 years (monthly compounding) grows to about Rs 2.05 million, from Rs 1.2 million of deposits. Read how monthly savings grow for more examples.
The rule of 72
A quick estimate: divide 72 by the yearly rate to find roughly how many years it takes to double your money. At 12%, money doubles in about 6 years. See the rule of 72 for details.
Where compounding works against you
Debt compounds too. Credit card balances and loans with unpaid interest grow the same way. That is why paying off expensive debt is often the best “investment”; compare with the Loan Calculator.
Next steps
To see what regular saving can do, read how monthly savings grow. If you are comparing rates from different banks, the Percentage Calculator shows the gap between two rates in seconds.
Frequently asked questions
What is the compound interest formula?
A = P × (1 + r/n)^(n × t), where P is principal, r the yearly rate, n compounding times per year and t years.
Is monthly compounding better than yearly?
Slightly, at the same rate, because interest starts earning interest sooner.
What is the difference between simple and compound interest?
Simple interest is earned only on the original amount; compound interest is also earned on previous interest.