Difference between simple and compound interest

Last update: 22/05/2023
Author: Sebastian Vidal


Introduction

If you are a person looking to invest your money, it is essential to understand the difference between simple and compound interest. In this article, we will explain in a clear and concise way what the characteristics of each one are.

Interés simple

Simple interest is that which is calculated only on the initial capital invested. This means that if you invest $100 at a simple interest rate of 10%, after one year you will have a return of $10, which means that you will have a total of $110 at the end of the period.

It is important to note that simple interest does not accumulate, which means that the return in the second year will be the same as the first year, as long as the interest rate and the capital invested are the same.

Characteristics of simple interest

  • Interest is calculated only on the initial capital.
  • There is no accrual of interest.
  • There is no multiplier effect.
  • It is used for short periods of time.
Exclusive content - Click Here  The future of X Money after the departure of Linda Yaccarino as CEO of X

Interés compuesto

Compound interest is that which is calculated on the initial capital plus the interest generated during each investment period. Therefore, if you invest $100 at an interest rate compounded at 10% annually, at the end of the first year you will have a total of $110. However, at the end of the second year you will have a total of $121, since the interest is calculated on the initial capital and the interest previously generated.

Características del interés compuesto

  • Interest is calculated on the initial capital plus the interest generated.
  • There is accumulation of interest.
  • There is the multiplier effect.
  • It is used for long periods of time.

Conclusion

Now that you have understood the differences between simple and compound interest, you will be able to make better decisions when investing your money. The important thing is to always take into account the investment terms and interest rates to calculate the final return.