What is an example of compound interest in real life?

An example of compound interest in real life is a longterm savings account. Let's say you deposit Rs. 10,000 into a savings account that earns an annual interest rate of 5%, compounded annually.

In the first year, your account will earn Rs. 500 in interest (Rs. 10,000 0.05). At the end of the year, your total balance will be Rs. 10,500.

In the second year, the interest will be calculated based on the new balance of Rs. 10,500. With the same 5% interest rate, you will earn Rs. 525 (Rs. 10,500 0.05). Your total balance at the end of the second year will be Rs. 11,025.

This process continues, with the interest being calculated based on the new balance each year. Over time, the interest earned on the accumulated balance starts to compound, resulting in exponential growth of your savings.

By the end of, let's say, 10 years, your initial deposit of Rs. 10,000 would have grown to approximately Rs. 16,386, assuming no additional deposits or withdrawals were made during that time.

This example demonstrates how compound interest allows your savings to grow exponentially over time, as the interest is earned not only on the initial amount but also on the accumulated interest from previous periods.