# Understanding interest rates

posted by on .

What would be the diffrence in earning between simple and compound interest if your initial balance was \$1,000 rather than \$100?

What would be the diffrence in earnings between simple and compound interest on your \$100 saving after five years?

MY ANWER: there won't be a diffrence.

I have no idea how to do this I'm just guessing..

• Understanding interest rates - ,

Naturally, there must be some difference, or there would be no need for two different terms.

If you invest \$1000 at simple interest, say 5%, then every year you collect \$50 interest, or 5% of \$1000.

A chart of principal and interest for a few years would look like:

1000 50
1000 50
1000 50
. . .

However, with compound interest, when the interest is paid, it becomes part of the principal for the next year. So, its chart would look like

1000.00 50.00
1050.00 52.50
1102.50 55.13
1157.63 57.88
. . .

as you can see, compound interest grows faster than simple interest.