Compound Interest vs Simple Interest: What's the Real Difference
Same word, "interest," but two very different growth curves — and the gap between them gets bigger the longer your money sits.
Simple interest: a flat rate on the original amount
Simple interest is calculated only on the original principal, every period, for the life of the loan or investment. The formula is straightforward: interest = principal × rate × time. A $1,000 investment at 5% simple interest earns exactly $50 a year, every year, whether it's year 1 or year 20. The Simple Interest Calculator handles this directly.
Compound interest: interest earning interest
Compound interest is calculated on the principal plus any interest already earned. That means each period's interest is a little bigger than the last, because it's being calculated on a growing base. The same $1,000 at 5% compounded annually earns $50 in year one, but $52.50 in year two (5% of $1,050), then $55.13 in year three, and so on — the gap widens every year. The Compound Interest Calculator lets you set how often it compounds (annually, monthly, daily) since more frequent compounding grows slightly faster too.
Why the difference is bigger than it sounds
Over short periods, simple and compound interest look almost identical. Over long periods, they diverge dramatically. $1,000 at 5% simple interest over 30 years grows to $2,500. The same $1,000 at 5% compounded annually grows to about $4,322 — nearly 73% more, from the exact same rate, purely because of how the interest is calculated. This is the entire reason "start investing early" is common financial advice: time is what makes compounding powerful, not the rate itself.
Which one applies to you?
Most savings accounts, investment accounts, and mortgages use compound interest. Simple interest shows up in some personal loans, certain bonds, and basic interest calculations used in textbooks. If you're not sure which applies to a specific account, check the terms — the difference compounds (no pun intended) significantly over time. For projecting a real investment with regular monthly contributions on top of compounding, the Investment Calculator combines both effects in one projection.