Wednesday, December 26, 2012

Financial Food for Thought (Compound interest vs Simple Interest)

What is Compound Interest?

Compound interest is interest that is paid on both the principal (the original investment) and also on any interest the principle earns every year. For example, if I received 15% interest on my $1000 investment, the first year and I reinvested the money back into the original investment, then in the second year, I would get 15% interest on $1000 and the $150 (15%) I reinvested. Over time, compound interest will make much more money than simple interest.

What is Simple Interest?

Simple interest is interest paid on the principal alone. Simple interest is called simple because it ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included.

I'm sure you will agree that investment accounts that compound interest are much more profitable than accounts that simply pay interest on the principle alone.

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