What is the compound interest on RS 1000 for 3 years at the rate of 10% compounded annually?

The Power of Compounding: Turning ₹1000 into ₹1331 in Just 3 Years

Compound interest, often hailed as the eighth wonder of the world, is a powerful financial tool that can significantly amplify your investments over time. It’s the concept of earning interest not only on your initial principal but also on the accumulated interest from previous periods. This snowball effect can lead to substantial growth, especially over longer time horizons. Let’s explore this with a practical example: What happens to ₹1000 invested for 3 years at a 10% annual compound interest rate?

Year 1:

• Starting amount: ₹1000
• Interest earned (10% of ₹1000): ₹100
• Ending balance: ₹1000 + ₹100 = ₹1100

Year 2:

• Starting amount: ₹1100 (previous year’s ending balance)
• Interest earned (10% of ₹1100): ₹110
• Ending balance: ₹1100 + ₹110 = ₹1210

Year 3:

• Starting amount: ₹1210
• Interest earned (10% of ₹1210): ₹121
• Ending balance: ₹1210 + ₹121 = ₹1331

As you can see, the interest earned each year increases due to compounding. After three years, the initial investment of ₹1000 grows to ₹1331. This represents a total interest earned of ₹331 (₹1331 – ₹1000).

While ₹331 might not seem like a huge amount, the impact of compounding becomes truly remarkable over longer periods. Imagine the growth potential over 10, 20, or even 30 years! This simple example underscores the importance of understanding and harnessing the power of compound interest to achieve your financial goals. It demonstrates how consistent investment, coupled with the magic of compounding, can turn modest sums into substantial wealth over time.