Compounding

A bank keeps our deposits safe — and also lends them to businesses and other people. In return it pays us a little extra money regularly (monthly, quarterly — four times a year — or yearly), called interest (ब्याज). So our savings grow over time.

Interest is the amount charged for borrowing money, or earned by lending it, usually written as a percentage.

Let's work it out. You get ₹1,000 on your birthday and put it in a bank that pays 6% interest a year. After one year: ₹1,000 + (6/100 × 1,000) = ₹1,000 + ₹60 = ₹1,060.

Leave it another year, and you earn 6% on ₹1,060, not just on ₹1,000: 6% of 1,060 = ₹63.60. So after two years you have 1,060 + 63.60 = ₹1,123.60.

You earn interest not only on your original money but also on the interest you earned before. Earning interest on interest is called compounding. Keep saving for 12 years, and your ₹1,000 grows to ₹2,012.20 — it has doubled without you doing anything!

A story shows how powerful doubling is. A king of Ambalappuzha in Kerala loved chess. He challenged a visiting sage and promised any reward if the sage won. The sage asked for something that sounded tiny: one grain of rice on the first square of the chessboard, two on the second, four on the third, doubling each time for all 64 squares. The king laughed and agreed.

The 8th square (end of the first row) needed 128 grains; the 9th, 256; the 10th, 512; the 11th, 1,024. By the 16th square it was 32,768 grains, and by the 32nd, over 210 crore — and that is only halfway across the board! The king learnt the power of this kind of growth (exponential growth) only after paying a heavy price.

How do you keep track of your money? The bank gives a passbook, like a diary recording every amount paid in and taken out; it can be updated at the bank. In it, debit means money taken out of your account, and credit means money coming in.