The "Magic" of Compound Interest: The 8th Wonder of the World

What is Compounding? (The Snowball Effect)

Imagine you are at the top of a snowy mountain, and you roll a small snowball down.

• At first, it stays small.

• But as it rolls, it picks up more snow.

• Because the snowball is now bigger, it has more "surface area" to pick up even more snow.

By the time it reaches the bottom, it’s a giant boulder.

In money terms, compounding is earning interest on your interest. You aren't just making money on your original savings; you are making money on the profit you made last year.

Simple vs. Compound: A Tale of Two Friends

Imagine two friends, Arjun and Sarah, both start with ₹1,00,000.

• Arjun (Simple Interest): He earns 10% every year but withdraws his ₹10,000 profit to spend it. Every year, his "snowball" stays exactly the same size. After 30 years, he still only has his original ₹1 Lakh plus the cash he spent.

• Sarah (Compound Interest): She earns 10% but leaves it in.

  • Year 1: She earns 10% on ₹1,00,000 = ₹10,000 profit.

  • Year 2: She earns 10% on ₹1,10,000 = ₹11,000 profit.

  • Year 3: She earns 10% on ₹1,21,000 = ₹12,100 profit.

Do you see the magic? Sarah’s money is working harder every single year, even though she didn't add a single extra Rupee!

The Secret Ingredient: TIME

The "curve" of compounding starts flat and then shoots up like a rocket. The most important factor isn't how much money you start with, or even how high the interest rate is—it's how long you stay invested.