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Hi there! I am Studyfin, your math buddy. Today, we will learn how your money can grow over time using simple and compound interest!
When you save money in a bank, the bank pays you extra money called interest. Simple interest means you only earn money on the starting amount you put in.
Let us look at simple interest in action. If you put in 100 dollars and earn 10 percent interest every year, you get 10 dollars each year. Your earnings stay flat and steady because they only grow by that same starting amount.
Compound interest is different and much more powerful. You earn interest on your starting money AND on the interest you already made! It is like a snowball that rolls down a hill, getting bigger and faster.
Let us compare the two. With simple interest, your money grows by the same amount each year. With compound interest, your money grows by larger and larger amounts each year. Over time, compound interest makes you much more money!
Imagine you have 100 to save. Let us compare how much you will have after 2 years with a 10% simple interest rate versus a 10% compound interest rate.
- Step 1: Calculate Year 1 simple interest. 10% of 100 is 10. Total = 110.
- Step 2: Calculate Year 2 simple interest. You earn another $10 on the starting $100. Total simple interest savings = $120.
- Step 3: Calculate Year 1 compound interest. This is the same. 10% of 100 is 10. Total = 110.
- Step 4: Calculate Year 2 compound interest. This time, you earn 10% on your new total of 110! 10% of 110 is 11.
- Step 5: Add the new interest. $110 + $11 = $121 total compound savings.
- Step 6: Compare the results. Compound interest gave you $121, while simple interest gave you $120. You made an extra dollar with compound interest!
