What is the compound interest on 10000 at 10% per annum for 3 years?

Unlocking the Power of Compound Interest: Watching Rs. 10,000 Grow

Compound interest. It’s a phrase that’s often tossed around in financial discussions, but its true power lies in its ability to generate exponential growth over time. Let’s explore this concept by examining how an initial investment of Rs. 10,000 performs with a 10% annual interest rate, compounded yearly, over a period of three years.

Forget the simplicity of simple interest, where the interest earned remains constant year after year. Compound interest, on the other hand, takes the earnings from previous periods and adds them back to the principal. This newly enlarged principal then earns interest in the subsequent period, creating a snowball effect.

So, how does this work in practice with our Rs. 10,000 investment?

• Year 1: The initial investment of Rs. 10,000 earns 10% interest, which amounts to Rs. 1,000 (10,000 * 0.10). This interest is added to the principal, bringing the total to Rs. 11,000.

• Year 2: Now, the interest is calculated on this new principal of Rs. 11,000. A 10% return on Rs. 11,000 yields Rs. 1,100 (11,000 * 0.10). Adding this interest to the principal brings the total to Rs. 12,100.

• Year 3: Finally, the interest is calculated on the Rs. 12,100. Earning 10% on this amount results in Rs. 1,210 (12,100 * 0.10). Adding this final interest payment to the principal leads to a grand total of Rs. 13,310.

Therefore, after three years, the initial investment of Rs. 10,000 has grown to a significant Rs. 13,310. This growth of Rs. 3,310 represents the magic of compounding in action.

The Key Takeaway: Time is Your Ally

This simple example perfectly illustrates the potential of compound interest. While a 10% return is certainly beneficial, it’s the consistent reinvestment of earned interest that truly amplifies growth. The longer the investment period, the more pronounced the effects of compounding become.

So, whether you’re saving for retirement, a down payment on a house, or simply building wealth, understanding and leveraging the power of compound interest is a crucial step towards achieving your financial goals. Start early, stay consistent, and let the power of compounding work its magic over time.