Simple and Compound Interest on Sums Imagine you have $100 saved up. Over time, you earn some interest, which is like a small addition to your savings. Sim...
Imagine you have $100 saved up. Over time, you earn some interest, which is like a small addition to your savings.
Simple Interest:
This is the interest calculated on the original principal amount (the initial amount you started with).
It is calculated by multiplying the principal amount by the interest rate.
In our example, if the interest rate is 5% and the principal amount is 100 = $5.
Compound Interest:
This is the interest calculated on the principal amount plus any accumulated interest from previous periods.
It allows your savings to grow at a higher rate over time.
In our example, if the interest rate is 5% and the principal amount is 100 + 0.05) = $5.25.
The difference between Simple and Compound Interest:
Simple interest is calculated on the original principal amount, while compound interest is calculated on the principal amount plus any accumulated interest.
This means that compound interest can lead to a higher total return over time compared to simple interest.
Examples:
If you invest 5, while the compound interest would be $5.25.
After 5 years, the simple interest would be 5.38.
Key Points:
Simple interest is easy to calculate, but it can lead to a lower total return over time.
Compound interest is a more effective way to grow your savings, as it allows interest to compound over multiple periods.
Compound interest can be used to earn higher returns on savings and investments