Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the subsequent periods.

Formula for calculating Simple Interest rate

Simple Interest rate = P x I x N

P = principal (Invested amount)

I = interest rate for one period

N = number of periods invested

You Invested RS 50,000 for 3 years at 10 %

Simple interest rate = P x I x N = 50,000 x 0.1 x 3 = 15,000

Note - You earned total interest of RS 15000 for period of 3 years

Now lets see how compounded interest rate works -

Compound interest is calculated each period on the

We will take same above example to calculate compound interest.

Suppose you Invested RS 50,000 for 3 years at 10 % at

Interest for Year 1 = P1 = P x I x N = 50,000 x 0.1 x 1 = 5,000 (total = 55,000)

Interest for Year 2 = P2 = (P1) x I x N = (55,000) x 0.1 x 1 = 5,500 (total = 60,500)

Interest for Year 3 = P3 = (P2) x I x N = (60,500) x 0.1 x 1 = 6,050 (total = 66,550)

Total interest earned over the period of three years through compound interest rate = 5000 + 5500 + 6050 =

Now you can compare this to 15,000 earned over the same number of years using simple interest rate.

This little story shows you the power of compounding and points out the fact that the earlier you start investing the better it gets.

Let's have a look on following example between two friends Mr. White and Mr. Black.

Both friends started working at the same time at the age of 25.

Mr. White starts investing at 25 and invests Rs 50,000 per year and continues till 10 years.

Let’s assume that he earns an interest rate of 10% every year, so at the end of ten years Mr. White has been able to accumulate Rs 8, 64,768 (He invested 5 lakh)

After 10 years Mr. White decided not to invest but at the same time he decided to invest the accumulated money and let it grow and does not touch it till his retirement 60 years.

o he lets the Rs 8, 64,768 lakh grow and assuming that the amount continues to earn an annual interest rate of 10% every year and finally he would have been able to accumulate around

**Rs 93, 69,506 lakh by the time he turns 60**.

So the Rs 5 lakh (Rs 50,000 x 10 years) had invested in the first ten years has grown to Rs 93 lakh even though Mr. White stopped investing Rs 50,000 every year after the first ten years.

Now let's move to Mr. Black who started investing at the age of 35 of Rs 50,000 every year. He invests this amount every year till he turns 60, i.e. for 25 years.

Let assume that he also earns 10% interest per year on his investments so at the end of 60 years Mr Black has managed to accumulate Rs 5,359,839 lakh.

Even after investing Rs 50,000 regularly for 25 years, Mr Black has managed to accumulate Rs 53,59,839 lakh, which is around Rs 40,09,667 lakh less in comparison to Mr White.

o he lets the Rs 8, 64,768 lakh grow and assuming that the amount continues to earn an annual interest rate of 10% every year and finally he would have been able to accumulate around

So the Rs 5 lakh (Rs 50,000 x 10 years) had invested in the first ten years has grown to Rs 93 lakh even though Mr. White stopped investing Rs 50,000 every year after the first ten years.

Now let's move to Mr. Black who started investing at the age of 35 of Rs 50,000 every year. He invests this amount every year till he turns 60, i.e. for 25 years.

Let assume that he also earns 10% interest per year on his investments so at the end of 60 years Mr Black has managed to accumulate Rs 5,359,839 lakh.

Even after investing Rs 50,000 regularly for 25 years, Mr Black has managed to accumulate Rs 53,59,839 lakh, which is around Rs 40,09,667 lakh less in comparison to Mr White.

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Mr White has invested only Rs 5 lakh for 10 years and he earns interest rate of 10% and at 60 years he accumulated

Case 2

Mr. Black started invested Rs 12, 50,000 lakh for 25 years and he earns interest rate of 10% and at 60 years he received 53,59,839 lakh.

Till now you would have understood the power of compounding interest rate and benefit of investing as early as possible.

You can invest anywhere where you can expect decent returns like say 12 , 14, 16 or wherever you find higher.

As you have already read in above example that earning even 10% annual will make you to reach your targets.

Some ways for investments are

1. Mutual funds- Equity mutual funds and balanced mutual funds.

2. In undervalued and growth oriented companies in stock markets.

Note - In closed ended mutual fund where your money will get locked for 3 years, so in such scenario it is not possible for you to get compounded annual interest.

There is always risk involved in investments, especially in stocks and in mutual funds.

The risk percentage depends on where you invest your money for example -

If you choose to invest in Equity related mutual funds then the risk involved is high and if you choose to invest in balanced mutual fund then the risk is medium and so on.

If you plan properly and systematically at early stage of your life then your future life will be very comfortable and smooth.

And also there will be no need for you to run everywhere to earn money in future.

So he lets the Rs 8, 64,768 lakh grow and assuming that the amount continues to earn an annual interest rate of 10% every year and finally he would have been able to accumulate around

So the Rs 5 lakh (Rs 50,000 x 10 years) had invested in the first ten years has grown to Rs 93 lakh even though Mr. White stopped investing Rs 50,000 every year after the first ten years.

Now let's move to Mr. Black who started investing at the age of 35 of Rs 50,000 every year. He invests this amount every year till he turns 60, i.e. for 25 years.

Let assume that he also earns 10% interest per year on his investments so at the end of 60 years Mr Black has managed to accumulate Rs 5,359,839 lakh.

Even after investing Rs 50,000 regularly for 25 years, Mr Black has managed to accumulate Rs 53,59,839 lakh, which is around Rs 40,09,667 lakh less in comparison to Mr White.

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