Simple vs Compound Interest
Simple interest is calculated only on the initial principal amount of a loan or deposit. Compound interest, on the other hand, is calculated on the principal amount AND the accumulated interest of previous periods.
Over short periods, the difference between the two might seem small. However, over decades, compound interest can lead to significantly higher wealth accumulation.
The Power of Compounding
Because compound interest calculates interest on top of interest, your money grows at an accelerating rate. This "interest on interest" effect is why starting to invest early is so critical for retirement planning.
- Simple Interest Formula: Principal × Rate × Time
- Compound Interest Formula: Principal × (1 + Rate)^Time - Principal