L1 · Starter: How Markets Work / Money Basics
X0007
Simple vs Compound Interest
Two accounts both pay 10% a year. After 20 years, one has far more money. How?
Simple interest grows only your first amount. Compound interest also grows the interest you already earned.
The story
Family lunch. Arjun and his cousin Riya compare old bank letters. Meera is a family friend at the table.
Arjun: Riya and I both got 10% a year on ₹1,00,000. But her account has way less. Did the bank cheat her?
Meera: No. Riya, does your bank send you the interest every year?
Arjun: She says yes. ₹10,000 straight into her savings account, every year.
Meera: That's simple interest. Always 10% of the first ₹1,00,000. And yours, Arjun?
Arjun: Mine stays inside. So in year two I got 10% on ₹1,10,000. That's ₹11,000.
Meera: That's compound interest. Interest on interest. At first the gap is just ₹1,000.
Arjun: And after 20 years?
Meera: Riya has ₹3,00,000 in total. You have about ₹6,72,700.
Arjun: Wait… same 10%, and I have more than double?
Meera: Same rate. Different rules. Let's find the year the gap passes ₹1 lakh.
What you just saw
The grey dashed line is simple interest. It is straight, because the yearly gain never changes.
The blue line is compound interest. It curves up, because every year's gain is bigger than the last.
The longer you wait, the bigger the gap.
Simple grows in a straight line. Compound grows in a curve.
Practise it in the Compounding & money.