You want to earn as much interest as possible on your savings but not pay more than you have to when you borrow. One of the biggest factors in both is whether you’re accruing simple or compound interest.
Simple Interest: Calculated annually on the amount you deposit or owe.
Compound Interest: Interest earned is added to the principal, forming a new base on which the next round of interest is calculated. This can accrue daily, monthly, or quarterly.
Enter the starting balance and use the sliders to adjust the monthly contribution, interest rate, and years. The graph will demonstrate the growth of the principal and interest earned/owed with simple interest vs compound interest.
If the rates and length of time are the same, compound interest will eventually be higher than simple. If you’re earning interest, that’s great! If you’re paying it, it’s not ideal.
If you aren’t sure what kind of interest your loan has, check your loan documents or contact your lender. Most credit cards will use compound interest while federally owned student loans and auto loans will use simple interest. Virtually all mortgage loans are amortized using a simple interest calculation.
