What is compound interest ? | What is power of Compounding? | How does compounding work?
Compound interest is the interest that is calculated not only on the principal amount of a loan or investment, but also on the accumulated interest from previous periods. In other words, it is the interest earned on both the principal and any interest that has been earned previously.
For example, if you invest Rs.1,000 in a savings account that earns an annual interest rate of 5%, at the end of the first year, you will have earned Rs. 50 in interest, for a total of Rs. 1,050. If you leave that money in the account and earn another 5% interest on the new balance of Rs.1,050 in the second year, you will earn Rs. 52.50 in interest, for a total of Rs.1,102.50. The interest earned in the second year is calculated not only on the initial principal of Rs. 1,000, but also on the interest earned in the first year (Rs.50). This compounding effect continues for each subsequent year.
Compound interest can have a powerful effect over time, as the interest earned on previous interest can quickly add up. It is commonly used in various financial products such as savings accounts, bonds, loans, and mortgages, and it is an important factor to consider when making financial decisions.
In this video CA Chanchal Agarwal is explaining what is compound interest , how does is work and how powerful it is with few examples.
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