One of the primary reasons for putting your money into a bank or another savings account is because your money can gain interest. However, there are different types of interest that your money can earn.
What is Simple Interest:
Simple interest is when you multiply a given interest rate by the original amount, also known as the principle. Simple interest will not put interest on interest or “compound.”
The formula for calculating simple interest is A=P×I×N.
I=daily interest rate
N=number of days between payments
What is Compound Interest:
Compound interest is similar to simple interest. However, you are also able to earn interest on interest from the principal amount.
The formula for calculating compound interest is A = P(1 + r/n)^nt.
P=initial principal balance
n=number of times interest applied per time period
t=number of time periods elapsed
Which is Better:
There’s no perfect answer for which type of interest is better. Simple interest is sometimes applied for short-term personal loans and automobile loans. This type of interest also works better if you make payments early or on time, instead of late.
On the other hand, compound interest is also a very powerful tool for generating wealth. It is ideal for people who want to earn interest on their money, for example, savings in a bank account or investors.
Written by Allie Chang