What’s the difference between simple interest and compounding interest? Say you invest Php10,000 today at a 10% interest rate. With simple interest, you will earn Php1,000 every year (10,000 x 10%) as long as your money is kept invested. And in 5 years, your money plus interest will total Php15,000. That’s because, with simple interest, only the principal (the original amount invested, in this case, the Php10,000) earns interest.

With compounding interest, here’s what happens to your money if you keep it invested at a 10% interest rate:

Year 0 ➡️ Invest P10,000
Year 1 ➡️ 10,000 + 10% = 11,000
Year 2 ➡️ 11,000 + 10% = 12,100
Year 3 ➡️ 12,100 + 10% = 13,310
Year 4 ➡️ 13,310 + 10% = 14,641
Year 5 ➡️ 14,641 + 10% = 16,105

That’s a difference of Php1,105 in just 5 years (16,105 – 15,000). It’s because with compounding interest, not only will your principal earn interest but your interests as well. The difference may seem insignificant in the short term, but if you keep your money invested, it will give you considerable wealth in the long term.

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Suggested readings:

Retirement Strategy – https://bit.ly/IMPH-RetirementStrategy

Rule of 72 – https://bit.ly/IMPH-Rule-of-72

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