This is because the interest of your invested money is also earning interest. He who understands it earns it and he who doesn’t pays it.” Compounding is a very powerful concept. A credit card loan is usually compounded monthly and a savings bank account is compounded daily.Īlbert Einstein rightly said, “Compound interest is the 8th wonder of the world. Also, the frequency of compounding depends on the instrument. The higher the frequency of compounding, the greater the amount of compound interest. Daily, weekly, monthly, quarterly, half-yearly and annually are the most common compounding frequencies. Frequency of compounding is basically the number of times the interest is calculated in a year.
Compounding is done on loans, deposits and investments. When the principal includes the accumulated interest of the previous periods and interest is calculated on this then they say it’s compound interest.
Assess & improve your financial health across 6 critical parameters.Ĭheck Your Score What is Compound Interest?Ĭompound interest in simple terms means interest on interest.
