Money To Live

October 24, 2013

Compound Interest

Filed under: banks,investments — by moneyconsciously @ 12:40 pm

Compound interest earns you more money than simple interest. With simple interest, you earn interest only on the principal. With compound interest you reinvest the interest, i.e. each cycle your new principal is larger, and so over time you earn more interest.

This may not be news, but it’s the topic of this post because recently I observed someone make a calculation error. Here’s an example for a principle of $1000, rate of 3%, and time of 15 years.

Simple interest case: $1000 x (1 + 0.03 x 15) = $1450
Compound interest case: $1000 x (1.03)^15 = $1560

That’s it.

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