What is compound interest in easy words?

Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

What is the power of compounding interest?

The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process. Suppose, you invest ₹ 1000 in a bank which offers 10\% interest per annum.

How is compound interest used in real life?

Examples of Compound Interest

1. Savings accounts, checking accounts and certificates of deposit (CDs).
2. 401(k) accounts and investment accounts.
3. Student loans, mortgages and other personal loans.
4. Credit cards.

How do you do compound interest?

Compound interest is calculated by multiplying the initial loan amount, or principal, by the one plus the annual interest rate raised to the number of compound periods minus one. This will leave you with the total sum of the loan including compound interest.

Why is the power of compounding important?

Why is compound interest important? Compound interest causes your wealth to grow faster. It makes a sum of money grow at a faster rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding period.

How do you explain interest?

Interest is the monetary charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR). Interest is the amount of money a lender or financial institution receives for lending out money.

How do you explain compound interest to a child?

Once they understand that their money earns money, you can move onto compound interest. Here’s a kid-friendly way to explain compound interest: Money you put into a savings account earns interest (money). Since it’s YOUR money, you get to keep the interest, and it’s added into your savings account total.

What is an example of the power of compounding?

Here’s a hypothetical example to highlight the power of compounding. Vijay and Geeta both invest Rs 50,000 each in an investment avenue that offers an annual interest rate of 10\% for 10 years. While Vijay chooses simple interest, Geeta opts for compound interest (read re-invest).

How does compound interest work in a savings account?

The bank pays you this interest because you’ve put your money into their bank.” Once they understand that their money earns money, you can move onto compound interest. Money you put into a savings account earns interest (money). Since it’s YOUR money, you get to keep the interest, and it’s added into your savings account total.

How do you explain interest to a 10 year old?

How to explain interest to a kid: “When you deposit your money into a savings account at the bank, your money earns its own money, called interest. The bank pays you this interest because you’ve put your money into their bank.” Once they understand that their money earns money, you can move onto compound interest.