The Difference Between Simple and Compound Interest
When you save or invest, interest will either be calculated at a Simple Interest Rate or a Compound Interest Rate. It is more financial beneficial for a savings account to accrue Compound Interest.
Simple Interest is calculated on the your investment only, for example:
Year 1 Account Balance of $1,000 x 3.0% Simple Interest = $30
Year 2 Save a further $1,000 bringing total of your savings to $2,000 x 3.0% Simple Interest = $60
Compound Interest is calculated on the balance of your savings, plus any previously earned interest that has been retained in the account, for example:
Year 1 Account Balance of $1,000 x 3.0% Compound Interest = $30.00
Year 2 Save a further $1,000 bringing total of your savings to $2,000, together with your interest from last year equals an account balance of $2,030 upon which you earn interest at 3.0% = $60.90
This little difference is what Albert Einstein called “the 8th Wonder of the World”... it doesn’t look like much when we compare the difference on $1,000 at a mere 3% over a year or two, but it makes a massive difference to the amount you will have when returns are higher, or you are saving more. The REAL difference it makes is over time (e.g. 20 years) - it will be the difference between your savings merely keeping pace with inflation or actually being worth more!
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