1. Definition of compound interest vs. simple interest
Compound interest is a method of calculating an investment that includes not only the principal but also the interest earned on an investment. It combines the principal and interest to determine the future value. Simple interest, on the other hand, refers to calculating interest only on the principal of an investment, which means that the return on an investment is only considered in relation to the principal of the investment.
2. The difference between compound interest and simple interest
Compound interest is a combination of principal and interest, which results in more interest being earned over time, increasing the principal amount invested, whereas simple interest does not increase the principal amount invested because interest is only earned on a fixed amount of principal. Therefore, compound interest can generate more profit, but the effect is greater over time, whereas simple interest only results in a constant profit, which does not increase over the investment period.
3. Investment implications
Compound interest is a clear indicator of how well an investment is performing and is best suited for long-term investments. Because the effect of compound interest grows over time, it’s a great way to make money over the long term.
(adsbygoogle = window.adsbygoogle || []).push({});