Which is better, an account that earns compound interest or simple interest? What's the difference?
Compound interest means that you get paid interest on the interest you earn. For example: say you deposit $500 into an account that pays 2% simple interest. You'll earn $.03 per day. On straight simple interest you'll earn $10 in one year. If your interest is compounded daily, on day two you'll get paid interest on $10.03. On day three you'll earn interest on $10.06, and so on. You get paid interest on interest. That isn't a whole lot because 2% on $.03 is only $.000002, but in this case with compounding interest you'd earn $10.10 in that year.
You can play with numbers like this in our calculators. The CD calculator works well with this scenario. More money and a higher rate will make those examples more pronounced, and today, every little bit helps.
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Compound interest means that you get paid interest on the interest you earn. For example: say you deposit $500 into an account that pays 2% simple interest. You'll earn $.03 per day. On straight simple interest you'll earn $10 in one year. If your interest is compounded daily, on day two you'll get paid interest on $10.03. On day three you'll earn interest on $10.06, and so on. You get paid interest on interest. That isn't a whole lot because 2% on $.03 is only $.000002, but in this case with compounding interest you'd earn $10.10 in that year.