What you'll learn
- Distinguish simple and compound interest
- Explain purchasing power at a high level
Interest is money earned or charged over time. Simple interest is calculated on the original amount. Compound interest can be calculated on the original amount plus earlier interest.
Inflation means prices generally rise over time, reducing purchasing power. A dollar amount may be the same later, but it may buy less.
Time horizon affects choices
Money needed soon often prioritizes stability and access. Longer-term money may have more time to handle uncertainty, but risk still matters.
Hypothetical example
At a 4% annual rate, $1,000 grows to about $1,216.65 after five years when interest compounds yearly. Real accounts can differ because of rates, fees, taxes, and rules.