The same $2000 will give $3200 after 10 years on simple interest, while you get $3638.79 on the same investment compounded monthly for 10 years. If the difference seems small for one year, let us understand the power of compounding in the long run.
The plan with compound interest will give you $2,123.36 at the end of the year, compounded monthly. Now, the plan that works on simple interest will give you $2120 at the end of one year. You can choose to put it in simple interest or compound interest as per the investment plans your bank offers.Īssume the interest is 6% - for both the plans with simple interest and compound interest. Let us understand APY calculation with an example: N = number of compounding periods per year (for ex: n=2, if compounding interest is half-yearly) The final amount that you would receive invested in the APY plan would be: A = I(1 + r/n) n*y The formula for calculating Annual Percent Yield is A = I(1 + r/n) n*y -1.
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