Simple Interest vs Compound Interest
Simple interest is calculated exclusively on the original principal amount. Compound interest calculates interest on the principal PLUS all previously accumulated interest ("interest on interest").
The Growth Comparison Formulas
- Simple Interest: I = P × r × t | Total = P(1 + rt)
- Compound Interest: A = P(1 + r/n)ⁿᵗ
10-Year Growth Example ($10,000 at 8%)
- Simple Interest: $10,000 + (10,000 × 0.08 × 10) = $18,000
- Compound Interest (Annual): $10,000 × (1.08)¹⁰ = $21,589.25