Comparing Simple and Compound Interest

The differences between simple and compound interest include the following. Simple interest refers to the interest an individual receives at the end of the year on the amount of money he/she deposited in the bank account (Miller & Stafford, 2009). When computing the amount of interest, the bank will only apply an interest rate to the original principle amount. On the other hand, Compound interest refers to the interest an individual earn on the principle amount and the interest the money deposited earned previously. Moreover, in the calculation of the simple interest, the principal amount remains constant and for the case of the compound interest, the principal amount changes because of the compounding effect.

As an investor, I would prefer to receive compound interest. Individuals are interested in investing in businesses that have higher returns. With the case of the banking system, I would prefer to receive compound interest because its growth rate is higher than that of the simple interest. I will be happy to see my money growing more quickly when it is earning compound interest than with the case of simple interest. According to Miller and Stafford (2009), compound interest has a higher returns on the amount deposited compared to the simple interest.


Miller, R. L., & Stafford, A. D. (2009). Economic Education for Consumers. Cengage Learning.

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