Definition:

Compound interest is the process where interest is earned on both the original amount of money and the previously earned interest.

It is often called:

"Interest on interest"

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How It Works:

You invest money → it earns interest

That interest gets added to your original amount

In the next cycle, interest is calculated on the new total amount

This process repeats over time

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Formula:

Where:

A = Final amount

P = Principal amount

r = Annual interest rate

n = Number of times interest compounds per year

t = Time in years

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Example:

₹10,000 invested at 10% annual interest

Year 1 → ₹11,000

Year 2 → ₹12,100

Year 3 → ₹13,310

Your money grows faster because interest keeps earning more interest.

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Why It Matters:

Long-term investing

Retirement funds

Mutual funds

Savings growth

The earlier you start, the more powerful compounding becomes.

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Key Takeaway:

Time is the biggest advantage in compound interest.

Small investments made early can grow into large amounts over decades.