Compound interest can earn more money over the long term compared to simple interest. This is because compound interest calculates interest not only on the initial principal amount but also on the accumulated interest from previous periods, leading to exponentially higher returns over time. The longer the investment period, the more significant the effect of compounding becomes, increasing total earnings substantially.
Key Differences Between Simple and Compound Interest
- Simple interest is calculated only on the original principal, producing linear growth.
- Compound interest is calculated on both the principal and the interest already earned, leading to faster and greater growth over time.
Impact of Compound Interest on Long-Term Earnings
- Over a 10-year period, compound interest can yield significantly more than the same rate paid as simple interest.
- The frequency of compounding (e.g., monthly, quarterly) also affects the total amount earned, with more frequent compounding typically producing higher returns.
Therefore, for investments intended to grow over a long horizon, compound interest is generally the more advantageous type of interest to maximize earnings.