Simple
Interest
First
of all, you have simple interest, which is just a measure of how much you can earn from your investment. You can determine about how much your investment can
earn you by multiplying your principal balance by the interest rate. From
there, multiply the number you get by the number of years you plan to invest,
and you’ll see what your interest rate is based on different decisions and
lengths of time.
Compound
Interest
Compound
interest, on the other hand, is indicative of how much you earn from your
investment plus how much interest you earn and/or have accrued. There is a
mathematical formula, A=P(1+r/n)^nt, that can help you to determine compound
interest. The formula takes into account the amount you have after compounding
(A), the principal balance (P), the interest rate (r), the number of times the
interest compounds each year (n), and the number of years it compounds (t).
Typically,
the more frequently your interest compounds, the more money you stand to earn.
It’s also true that compound interest does tend to grow money more quickly than
simple interest.
Which
Should You Choose?
So,
this brings us to a pressing question: what type of interest should YOU choose
to deal with on your investment? In truth, it really all depends on your goals
and other factors. In general, though, simple interest is a good choice if you
want something basic and easy to calculate.
However,
compounded interest does have its perks for those willing to go the extra mile
and really figure it out. As mentioned, it will allow your money to grow more
quickly, however, it may require higher monthly payments.
As
you can see, both options have their pros and cons. As such, neither choice is
“right” or “wrong.” It’s all a matter of choosing what works best for you.
No comments:
Post a Comment