Simple and compound interest

I have written an article before on the power of Compound Interest but to make the difference between Simple & compound interest apparent, I will explain them here.

If you invested $1,000 for 5 years at 5% interest rate, using Simple interest the interest would  be $500 per year or $2,500 total. $500 x 5 years = $2,500.

If you invested the same amount using compound interest the result would be $12,762.82. Every year the interest paid rises with compounding as you are earning money on the principle and also on the interest you are paid regularly. I will leave a copy of two calculators below so you can play with some figures later.

Here is a table to explain –

Simple interest $10,000 @ 5% interest per year.

Compound Interest $10,000 @ 5% interest per year.

As you can see the difference becomes larger as time progresses and by year 5 the Compound interest table is producing $607 interest, while the Simple interest table is still stagnant at $500 per year. Over a persons life time these differences can make a dramatic increase to their savings.

As you can see from my previous article on Compound interest, after saving $2.73 per day for 37 years, anyone can become a millionaire!

The most important thing about compounding is to understand it early and be prepared to save for the long term and reap the benefits. Although you may have “missed the boat” yourself there is no reason why you can’t save for your children (if you have them). Don’t be disheartened though. It’s never too late to start saving and although compounding has a more significant effect over the longer term, starting now is better than procrastinating!

Good Luck and please use the calculators below to look at savings projections. There are also more calculators on the calculator page.