What is the Difference Between Annuity and Compound Interest?

Annuity and compound interest are two different financial concepts that serve different purposes and work in distinct ways. Here are the key differences between them:

Annuity:

1. An annuity is an investment from which periodic withdrawals are made.
2. It requires a large sum of money as the initial investment.
3. In exchange for the investment, the insurance company promises to provide an income for a predetermined time period or for life.
4. Annuity investments can be increased by investing in equity and bond sub-accounts.

Compound Interest:

1. Compound interest is a lending rate that grows your initial investment over time through exponential growth.
2. It can be started with a small fund.
3. The investment value grows even in the absence of additional investment.
4. Interest is earned on a growing basis since interest is earned on interest.

In summary, an annuity is an investment that provides a steady income through periodic withdrawals, while compound interest is a method of growing an investment through exponential growth. Both concepts have their own advantages and disadvantages, and the choice between them depends on an individual's financial goals and risk tolerance.

Comparative Table: Annuity vs Compound Interest

Annuity and compound interest are two different financial concepts, and I will explain the differences using a table.

In summary, an annuity is a series of equal payments made over a specified period, while compound interest is the interest earned on the principal amount plus the interest from previous periods. Annuity calculations involve the present or future value of a series of cash flows, whereas compound interest calculations involve the principal amount, interest rate, and number of periods.