Simple Interest. Compounding Interest. What’s the difference?
David Crosetti of Seeking Alpha gives a great overview of compounding investment returns, and explains and why it is still one of the most valuable gifts savers have ever been given.
In contrast to simple interest, compound interest works very differently. Compound interest is the interest that an investor gets, not only on his/her original investment, but also on all of the interest that his/her investment earns over the term of the investment. Think of compound interest as being interest earned on interest.
“Compounding interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” – Albert Einstein
These two charts in particular, really help sum things up:
Simple Interest Compound Interest