Simple vs. Compound Interest
Understanding the difference between simple and compound interest is key to smart financial planning. While simple interest is calculated only on the principal, compound interest allows your wealth to grow exponentially.
Simple Interest Formula:
A = P(1 + rt)
Compound Interest Formula:
A = P(1 + r/n)^(nt)
- A: Total amount of money after n years
- P: Principal investment amount
- r: Annual interest rate (decimal)
- n: Number of times interest is compounded per unit t
- t: Time the money is invested for
The Power of Compounding:
Einstein famously called compound interest the "eighth wonder of the world." By reinvesting your returns, you earn interest on your interest, leading to significant wealth accumulation over long periods.