Asking for a Friend - What's the difference between simple interest and compound interest?

April 24, 2023

Question: What’s the difference between simple interest and compound interest?

Answer: Great question!

The best way to explain is to give an example:

Let's say you put $10,000 in a CD at 5% per year

  • Simple Interest would give you $500 per year. You would get this same amount each year.

  • Compound Interest would give you the same amount the first year, but then the following year you would earn 5% on $10,500, so the interest would be $525, and the next year you would earn $551.25 ($11,025 * 5%), and so on.


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