Differences and similarity's of Simple vs compound

While both types of interest will grow your money over time, there is a big difference between the two. Specifically, simple interest is only paid on principal, while compound interest is paid on the principal plus all of the interest that has previously been earned.

Compound interest

In the real world, simple interest is rarely used. When you deposit money into an interest-bearing account, or take out a line of credit, the interest that accumulates is added to the principal, and the next interest calculation is done on both the principal and the interest.

Similarities and differences

As an investor or depositor, you definitely want to earn compound interest, as it adds up greater over time. In the above example of the $1,000 five-year CD at 4%, a simple interest calculation would produce $200, $21 less than the monthly compounding.