When someone wants to take advantage of you, they use complex jargons to confuse you so you don’t ask a lot of questions, because let’s face it; no one likes feeling stupid. But you know what’s worse than feeling stupid? Getting way less than you deserve for years!
I’ll break it down for you like this…
You give me GHC 100 to invest for you for a year. This is your principal. I tell you, you know what, with a 12% simple interest, I will give you GHC 1 every month from January to December (GHC 100 *12%= GHC 12, which comes to GHC 1 for each month). So come Vals, come Independence Day, come Ramadan, come Christmas, you make only GHC 1 a month, which added together is GHC 12, which is 12% on your principal. Simple right?
You give me GHC 100 to invest for you for a year. This is your principal. I tell you, you know what, with a 12% compound interest, I give you GHC 1 for only month one. Now here’s where it get interesting. In month 2, when I’m paying your interest, I add the GHC 1 interest I paid you in month one to your principal (GHC 100) and calculate the interest on GHC 101 (your new principal). So every month, interest is paid on your principal PLUS the previous month’s interest earnings. Meaning every month your principal grows and 1% of GHC 100 becomes 1% of GHC 113.
Meaning…Simple interest earns you interest on your principal only. Compound interest earns you interest on your principal and interest on your interest.
In The End…
The total amount you take home for a GHC 100 principal with a 12% compound interest is more than the total amount you take home for a GHC 100 principal with a 12% simple interest.
What if my money is in a current account? You’re not amang. Sika nu eeshi!
You leave some of your money in your simple interest account and use some to start a DALEX SWIFT investment today. When you see your SWIFT invest growing like it’s been eating Cerelac, you’ll see that the garis soakings with no milk growth rate of your savings account is not acceptable. Thank me later.
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