Simple vs Compound Interest and Fixed Rate Annuities. When does 4% x 5% = 21.67%? Find out here!

A common mistake when calculating interest earnings is to use a simple interest calculation when the interest actually is compounding.

Simple interest states 4% x 5 = 20%. However, compounding is actually more complicated than this.

Compounding equation would look more like this:
4.00% x 1 = 4.00%
4.04% x 1 = 4.04%
4.16% x 1 = 4.16%
4.32% X 1 = 4.32%
4.49% x 1 = 4.49%
4.67% x 1 = 4.67%
So... 0.04 + 0.16 + 0.32 + 0.49 + 0.67 = 1.68%
1.68% + 20% = 21.68%

Earning interest on the interest is compounding!

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