Question 4 of 8 Jorge and Alma are talking about savings and investing. Alma explains that she puts 15% of her pretax pay into her retirement savings. She explains that not only does she have that money, but she also earns interest on both the money she's saved and the previous interest she's accrued. What is Alma describing? Inflation Principal Compound interest Withdrawal penalty

Question

Question 4 of 8 Jorge and Alma are talking about savings and investing. Alma explains that she puts 15% of her pretax pay into her retirement savings. She explains that not only does she have that money, but she also earns interest on both the money she's saved and the previous interest she's accrued. What is Alma describing? Inflation Principal Compound interest Withdrawal penalty

Answer 1

Compound interest

Answer 2

Alma is describing a financial principle where she earns interest not only on the initial amount she saves (principal) but also on any interest previously earned. This describes the concept of compound interest. Unlike simple interest, which is calculated only on the principal, compound interest generates interest on both the initial investment and the accumulated interest from prior periods, leading to exponential growth over time.

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