Simple vs Compound Interest — Why It Matters

Описание: The lesson is simple: take advantage of compound interest when you save and invest, and avoid paying it when you borrow. Start early, even with small amounts, and let time and compounding work for you instead of against you.

When it comes to growing your money, not all interest is created equal.
💡 Simple interest grows in a straight line.
💡 Compound interest grows exponentially — it earns on your earnings!

When we talk about interest, there are really two types that shape our financial lives: simple interest and compound interest.
Simple interest is calculated only on the original principal. For example, if you invest $1,000 at 5% simple interest for five years, your total will grow to $1,250 — a straight line increase. The formula is straightforward: I = P × r × n (principal × rate × time).
Compound interest, on the other hand, is much more powerful. It grows on both the principal and the accumulated interest. That same $1,000 at 5% compounded annually becomes $1,276 after five years — a curve, not a straight line. The formula is:
A = P × (1 + r/n)^(n×t).
This is why compound interest is often called the “eighth wonder of the world.”
In daily life, the difference is huge. Savings accounts or investments that compound can help your money grow much faster over time. Credit cards, however, charge compound interest against you — and if balances aren’t paid off, debt snowballs quickly.

Start early. Stay consistent. Let compound interest work for you, not against you.
👉 Whether it’s investing, saving, or paying down debt, understanding this difference is the foundation of smart money management.

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