Informed Decisions

1. There are two types of interest: simple interest and compound interest. Let's say you put $1000 into an account that offers a simple interest rate of 2% a year. If you leave your money in that account for one year, you will have $1020 at years end(your original balance of $1000 plus $1000x.02). If you leave the account alone for 10 years, your savings will total $1200. After 20 years , you will $1400 and so on.

2. Many loans, including auto loans and most mortgages, charge simple interest. As a borrower, you receive an amortization schedule that shows what your monthly payments will be and how much interest you will pay over time. The interest is calculated at the outset of the loan, and the amount you owe will not grow over time. As a result, you will not face increasing payments and longer loan terms on loans calculated with simple interest.

3. With compound interest , by contrast, accumulated interest is periodically added to your principal-the amount you put in-and begins earning interest , too. Essentially, your interest starts earning interest of its own. The interval at which that interest compounds varies from institution to institution. On some accounts, interest compounds daily, weekly or monthly; other accounts compound semi-annually or annually, And the shorter the interval the more quickly principal will grow.