The next year and each year thereafter, you will be paid $5 of interest on the principal of $100. Multiplying the principal by the interest rate gives you an interest payment of $5. Let's say you invest $100 (the principal) at a yearly interest rate of 5 percent. Simple interest is paid out as it is earned and does not become part of an account's interest-bearing balance. Simple interest is the amount of interest earned on the original amount of money invested. ![]() There are two basic types of interest: simple and compound. ![]() The great thing about compounding is that it doesn't require additional work on your part: you just sit back and watch your money grow. ![]() Innumerable investors have used it to their advantage to make their money grow faster than would be the case with simple interest. Perhaps you have heard of the miracle of compounding. How Close Are You to Being a Millionaire?
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