What is compound interest and how does it work?

Compound interest is interest calculated on both the initial principal and the interest already accumulated. Unlike simple interest (calculated only on principal), compounding means your returns earn their own returns. The formula is A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounding frequency per year, and t is years.

What is the Rule of 72?

The Rule of 72 is a quick mental formula: divide 72 by your annual return rate to estimate how many years it takes to double your money. At 12% per year, your money doubles in approximately 72 / 12 = 6 years. At 18%, it doubles in 4 years. It is an approximation, accurate within 1-2% for rates between 6% and 20%.

How does compounding frequency affect returns?

More frequent compounding (monthly vs yearly) produces slightly higher returns because interest is calculated and added to principal more often. The difference is most significant at high rates over long periods. For example, Rs. 100,000 at 15% for 10 years: annually compounds to Rs. 404,556; monthly compounds to Rs. 448,198 — a difference of Rs. 43,642.

Why does starting early matter so much in compounding?

Due to exponential growth, the final years of a long investment period contribute far more value than the early years. Starting 5 years earlier can result in 2-3x more wealth at retirement than starting 5 years later, even with identical monthly contributions. This is why every year of delay is disproportionately costly.

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Q: What annual return rate should I use for Pakistan investments?

For KSE-100 equity investments, historical average returns in PKR are approximately 20-25% per year, but with significant volatility. For conservative planning, use 12-15%. For savings accounts in Pakistan, use 10-12% (current rates). For bonds/T-bills, use 12-14%. Always model multiple scenarios — optimistic, base case, and conservative.

Calculate the exponential growth of your investments over time. Enter your starting balance, duration, and expected gain per period.

Starting Balance

Total Profit

Future Value

Starting Balance

PKR

Rs. 1KRs. 5M+

Period

periods

1100

Gain per Period

1%100%

Future Value

Starting Balance

Total Profit

Starting Balance

Periods

Gain per Period

Wealth Multiplier

Period-by-Period Projection

Estimated portfolio value at the end of each period.

Period	Starting Balance	Gain (%)	Period Profit	Ending Balance

⚠️ This calculator is for educational and illustrative purposes only. Returns are not guaranteed. Past market performance does not guarantee future results. Consult a qualified financial advisor before investing.

Compound Interest — Common Questions

Compound interest is interest calculated on both the initial principal and the accumulated interest. The formula is A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounding periods per year, and t is years. Unlike simple interest, each period's interest itself earns interest in the next period — this is what causes exponential growth.

Divide 72 by your annual return rate to estimate how many years it takes to double your money. At 12% per year: 72 ÷ 12 = 6 years to double. At 18%: 4 years. At 6%: 12 years. It is a quick mental estimate, accurate within 1-2% for rates between 6% and 20%.

More frequent compounding (monthly vs yearly) produces slightly higher returns because interest is calculated and added to principal more often. At 15% for 10 years on Rs. 100,000: annual compounding gives Rs. 404,556; monthly compounding gives Rs. 448,198 — a difference of Rs. 43,642 from frequency alone.

For KSE-100 equity investments, historical PKR returns average approximately 20-25% per year with significant volatility. For conservative planning use 12-15%. For savings accounts in Pakistan use 10-12% (current rates). Always model multiple scenarios — optimistic, base case, and conservative.

Due to exponential growth, the final years of a long investment period contribute far more value than the early years. Starting 5 years earlier can result in 2-3x more wealth than starting 5 years later with identical monthly contributions. Every year of delay is disproportionately costly because of this acceleration effect.