Simple Interest is calculated one time solely as a percentage of the principal sum. As an example, if the principle is $100, and the interest rate is 4%, the value at the end of the interest period (e.g. monthly, quarterly, semi-annually, annually) would be $104 (100 x 1.04).
Conversely, Compound Interest is calculated not only on the initial principal but also the accumulated interest of prior periods.
Using the prior example, the value at the end of the first period is $104, which now becomes the principal at the beginning of the second period. Therefore, at the end of the second period, the value would be $108.16 (104 x 1.04). With Compound Interest, the growth is exponential because the principal increases each period.
SavvyReaders understand that planning for retirement involves utilizing the power of Compound Interest to grow a portfolio and accumulate wealth.
Albert Einstein, a pretty smart fella, reportedly noted, “the most powerful force in the universe is compound interest.”
Check out the story of twins Robert and Ronald Smith for an illustration of Compound Interest.