📖 Understanding Simple vs Compound Interest

Interest is the cost of borrowing money or the reward for saving. There are two main types: Simple Interest (SI) and Compound Interest (CI). Understanding the difference is crucial for loans and investments.

Simple Interest is calculated only on the principal amount. If you invest ₹1,00,000 at 8% simple interest for 5 years, you earn ₹8,000 per year = ₹40,000 total. Amount after 5 years = ₹1,40,000.

Compound Interest is calculated on principal plus accumulated interest. The same ₹1,00,000 at 8% compounded quarterly for 5 years grows to ₹1,48,595. That's ₹8,595 extra compared to simple interest due to compounding effect.

The power of compounding is most visible over long periods. Albert Einstein reportedly called compound interest the "eighth wonder of the world." Start investing early to maximize this effect. Most banks use quarterly compounding for FDs and RDs.