Saving and earning interest
Financial management means planning income, spending and saving. Money saved can earn interest. With simple interest, only the original principal earns interest each year. With compound interest, interest is added to the balance so future interest is earned on interest too, which grows faster over time.
Key formula
Simple interest $I=Prt$. Compound amount $A=P\left(1+\dfrac{r}{100}\right)^{n}$, where $P$ is principal, $r$ the annual rate (%), $t$ or $n$ the time in years.
Choosing investments
A fixed deposit keeps money in a bank at a set rate for a fixed term — low risk, steady return. Shares may pay dividends and can rise in value, but prices fall too, so risk is higher. A loan is borrowed money that must be repaid with interest, so its cost must be compared against the benefit.
Worked example
Aina invests RM2,000 in a fixed deposit at 3% per year compound interest for 2 years. Amount $=2000\left(1+\dfrac{3}{100}\right)^{2}=2000(1.03)^2=2000(1.0609)=\text{RM}2{,}121.80$. Interest earned $=\text{RM}121.80$. With simple interest it would be $2000(0.03)(2)=\text{RM}120$, so compounding earns RM1.80 more.
Remember
- Write money as RM, e.g. RM2,000 — never a bare currency symbol.
- Compound interest earns interest on interest; simple interest does not.
- Higher expected return usually means higher risk.