Making money grow
When you put money into savings or an investment, the bank pays you interest for using your money. There are two main kinds: simple interest and compound interest.
Key idea
Simple interest: I = P × r × t, where P is the principal (starting amount), r is the yearly rate as a decimal, and t is the time in years. Compound interest amount: A = P × (1 + r)ᵗ, and the interest earned is A − P.
Simple interest
Simple interest is worked out only on the original principal, so it is the same each year. If you save RM800 at 5% for 3 years, then I = 800 × 0.05 × 3 = RM120, and the total becomes 800 + 120 = RM920.
Worked example
You invest RM1000 at 10% per year compound interest for 2 years. Amount A = 1000 × (1 + 0.10)² = 1000 × 1.1² = 1000 × 1.21 = RM1210. So the investment grows to RM1210, which is RM10 more than the RM1200 that simple interest would give.
Comparing the two
Compound interest pays interest on interest already earned, so over time it grows faster than simple interest at the same rate. The longer the time, the bigger the difference.
Remember
- Change the percentage rate to a decimal (5% = 0.05) before calculating.
- Simple interest: same amount each year on the original P.
- Compound interest always ends up higher than simple at the same rate and time.