Question

7. Explain difference between compounding interest and simple interest which one is used with retirement accounts?

Answer 1

Difference between simple interest and compound interest are as follows-

1. Simple interest is earned only on the principal amount while compound interest is earned both on the principal and accrued interest.

2. The amount of interest earned and growth of interest earned is lower in simple interest while the amount of interest earned and growth of interest earned is higher in compound interest.

3. Simple interest is easier to calculate than that of compound interest as it is complex to calculate.

4. Principal remains the same during the whole tenure in simple interest while principal keeps on growing due to additional interest accrued which is accumulated into principal in calculating compound interest.

5. There are lesser returns in simple interest as comparison to compound interest.

With the retirement accounts, Compound Interest is always used as it helps in growth more money than simple interest.