subject: Compound Interest Formula: Simple Interest And Compound Interest [print this page] Before there was the compound interest formula, of course, the principle of compound interest was created first. It will probably get you to thinking on where the idea itself originated. All I know is that it original on basic interest itself. Mere interest is today known as simple interest. Yes, it also has simple interest formula, which is simple than the compound interest formula that we see today.
Simple Interest Formula And Concept
Simple interest is not as hard to understand like the compound interest. It is mainly an interest that is based on the principal amount. Let me give you an example of the simple interest. If I will be depositing four thousand dollars in a bank with a yearly rate of eight percent, what do you think will be the outcome in a four-year time?
The simple interest formula to get the answer
A = P*R*T
Wherein:
A is the total outcome of interest.
P is the principal amount.
R is the annual interest rate. It should be in decimal form when computing for the answer.
T is the time frame given.
A = P*R*T
A = (4000)(0.08)(4)
A = $1280.00
Compound Interest Formula And Concept
On the other hand, we have the compound interest formula with the compound interest concept. Since the simple interest does not get you that much profit, the compound interest shall save your investment. The compound interest formula or compound interest itself has the concept of gaining interest from interest itself that is added to the principal amount, as well. This makes the profits doubled and better. What happens is after gaining your first interest; it will be added to the principal amount that will result to your new principal amount. As the cycle continues, your principal amount gets larger resulting to more interests and profits. Using the simple interest formula, let me show the step by step way on how the compound interest formula works.
Using the same scenario as the one stated above, after a year with compound interest, this is what will happen to your deposited amount.A = (4000)(0.08)(1)A = $320.00
Therefore, your new principal amount is $320.00 plus $4000.00 which is $4320.00
After the second year, using the simple interest formulaA = (4320)(0.08)(1)A = $345.60
Therefore, your new principal amount is $345.60 plus $4320.00 which is $4665.60
After the third year, using the simple interest formulaA = (4665.60)(0.08)(1)A = $373.248
Therefore, your new principal amount is $373.248 plus $4665.60 which is $5038.848
After the fourth year, using the simple interest formulaA = (5038.848)(0.08)(1)A = $403.10784
Therefore, your new principal amount is $403.10784 plus $5038.848 which is $5441.95584
If you are curious, your total interest earned is $5441.95584 minus $4000 which is $441.95584 in total
Using a compound interest formula, you will easily the amount of $5441.95584.
If we will compare the simple interest and the compound interest we will have a result like this: $1441.96 (For compound interest) Minus $1280.00 (For simple interest)
A total of $161.96 is their difference in money. Now, that is big!
The conclusion is probably obvious by now; the compound interest concept is way better than the simple interest. The compound interest using both compound interest formula and simple interest formula, both tells that the compound interest can provide more interests than the simple interest. Even with compound interest formula and simple interest formula, the compound interest formula is better than going manual all the way like what we did. With the compound interest formula, you don"t have to compute, year by year. All you have to do is get the right compound interest formula and get the results. Today, a compound interest formula in calculator form is available to make computing easier and more convenient for us all.
