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The Ratio Of Difference Between Compound Interest And Simple Interest
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The Ratio Of Difference Between Compound Interest And Simple Interest
If you have ever been interested in investing, you have likely heard of compound interest and simple interest. Both of these concepts are key to understanding the mechanics of investing, and both can be quite confusing at first. In this blog post, we will explore the ratio of difference between compound interest and simple interest in detail. This will help you better understand the differences between the two, and how to best use them when investing in your own life or in the lives of others.
What is Compound Interest?
There is a lot of confusion around compound interest and simple interest. In this blog post, we will try to clear the air around these two concepts.
First, let’s start with compound interest. Compound interest is simply the process of earning interest on an initial investment multiple times over time. So, if you deposit $100 into a savings account that pays 2% annual compounded interest, your account would grow to $104 in five years.
However, many people mistakenly believe that simple interest is the only form of interest available. This isn’t actually the case – simple interest is simply the rate at which an investment accrues over time, without any additional payments (compound). So, if you deposit $100 into a savings account that pays 0.5% simple annual interest, your account would grow to $102 in five years.
Now that we’ve covered the basics, let’s talk about why it’s important to understand these different types of Interest rates:
With compound interest, your money grows exponentially over time – making it incredibly powerful for long-term wealth accumulation. However, while simple interest can help you make quick progress towards larger goals (like paying off debt), it won’t do as much to help your money grow exponentially over time (as compound does). That’s why it’s important to understand both forms of Interest when planning your financial future!
What is Simple Interest?
Simple interest is the simple algebraic product of an interest rate and the amount of time that has passed. So, if someone owes you $100 and their interest rate is 10%, then your simple interest would be $10 every day for 100 days.
Compound interest, on the other hand, is the result of compounding your original principal over time. So, if someone owes you $100 and their interest rate is 10%, but if you leave that debt un-compounded for 10 years, then your compound interest would be $102.50 ($10 × 10 = $100 + $101.50).
The Ratio of Difference Between Compound Interest and Simple Interest
Compound interest is always a better investment than simple interest. This is because compound interest grows larger and larger over time, while simple interest only grows by the amount of the original principal.
For example, if you have $100 that you want to invest in 5 years, with simple interest, your money will grow to $105 in 5 years: $100 x 0.05 = $5.
However, if you instead invest your money in compound interest, your money will grow to $111 in 5 years: $100 x 0.10 = $11.11.
Conclusion
The ratio of difference between compound interest and simple interest can be a little confusing, so here is an explanation of each. Compound interest is when money is invested and the bank calculates how much money has been added to the account over a period of time, typically monthly or yearly. Simple interest is when you borrow money from a lender and they calculate how much money needs to be paid back plus interest on top. The equation for simple interest is: P = I + r. This means that simple interest is simply the rate at which an investment accrues over time, without any additional payments (compound).
The ratio of difference between compound interest and simple interest is very important because it dictates which investment is a better option. Compound interest always outperforms simple interest, because it grows larger and larger over time.