Chapter 1 of 10All chapters
Chapter 1 of 10
Simple against compound
A line against a curve.
The difference
Simple interest pays on the original amount every period. Compound interest pays on the original plus everything earned so far, so each period starts from a larger base.
- 1,000 at 10 percent simple gives 100 every year, forever.
- The same compounding gives 100, then 110, then 121, accelerating.
Why it looks slow
Over a few years the two barely differ, which is why people underestimate it. Over decades the gap becomes enormous, and by then the choice was made long ago.