Simple interest stands for the money that one can earn from the funds that were initially invested while compound interest is the amalgamation of both the interest that one can earn and the initial investment.
Explanation:
The concept of simple interest relates to the money that one can earn based on their original investment. The monthly contribution formula can be used to display the growth of a person’s investments based on the funds they initially placed in their account. In order to calculate simple interest, one should multiply the interest rate by principal balance. The earned worth will reflect the rate of returns on investment on a long term scale.
As for compound interest, it is the representation of the funds that one can earn from adding the earned interest to the initial investment. The formula suggests that the sum of 1 and interest rate divided by the number of annual interest compounds should be multiplied by the principal balance. The rationale behind this formula is that the frequency of interest compounds directly affects the size of earnings one can get on the investment.
When comparing the compound and simple types of interest, it becomes evident that the latter is much easier to understand and calculate. When a person has a loan with non-compounding interest, they do not have to pay attention to the outstanding principal balance as no interest is added to it. On the other hand, compound interest is much more valuable in terms of investment economy because it creates opportunities for faster income growth compared to simple interest.