What Is Compound Interest? How This Powerful Concept Can Build Your Wealth Faster

If you’ve ever heard the phrase “let your money work for you,” you were likely hearing about compound interest—the silent wealth builder hiding in plain sight.

What is Compound Interest?

In simple terms, compound interest is the interest you earn on both the money you save and the interest that money has already earned. Unlike simple interest, which only earns interest on the original principal, compound interest grows exponentially over time.

💡 Formula: A = P (1 + r/n) ^ nt

Where:

A = final amount

P = principal amount

r = annual interest rate

n = number of times interest is compounded per year

t = number of years

Why It Matters (Whether You’re Borrowing or Investing)

Compound interest works for you when you’re investing, and against you when you’re borrowing.

Example 1 – Saving with Compound Interest:

• Principal = ₹1,00,000

• Annual Interest Rate = 7%

• Compounded annually for 10 years

You’ll end up with ₹1,96,715 — nearly doubling your money, thanks to compounding!

Example 2 – Loan with Compound Interest:

• Loan = ₹1,00,000

• Interest Rate = 10% compounded monthly

• Term = 5 years

You might repay over ₹1,64,000 —compound interest in reverse!

What’s Happening with Interest Rates Right Now?

The RBI repo rate, which affects interest rates on loans and deposits, was last reported at 5.50% (as of July 2025). This rate significantly influences:

• Fixed Deposit returns

• Loan EMIs

• Savings account interest

When RBI increases the repo rate, borrowing becomes expensive but savings grow faster. When it drops, EMIs go down but investment returns shrink too.

Want to Dive Deeper?

In our premium post, we’ll explore:

• Detailed modeling for SIPs, FDs, and loans

• Exact compounding timelines

• A printable “Compound Interest Growth Chart”

• How to use compounding to become financially free