💵 Simple vs Compound Interest: What's the Difference?

Two savings accounts, same rate, same amount, same number of years — and one ends up with noticeably more money. The difference isn't a trick; it's whether the interest is simple or compound, and understanding which is which changes how you think about both saving and borrowing.

Simple Interest: A Flat Rate Every Year

Simple interest is calculated only on the original principal, every single period, regardless of how much interest has already accumulated:

$10,000 at 5% simple interest earns exactly $500 every year — year one, year five, year twenty, always the same, because it's always calculated on the same original $10,000.

Compound Interest: Interest on Interest

Compound interest is calculated on the principal plus whatever interest has already been added — so each period's interest is a little larger than the last, because it's earning a return on top of previous returns, not just the original amount.

Why Compounding Frequency Matters

The more frequently interest compounds, the sooner each bit of interest starts earning its own interest — so daily compounding produces a slightly higher return than annual compounding, even at the identical stated rate.

Why This Matters Both Ways

Compound interest is what makes long-term saving and investing so powerful — money genuinely grows faster than a flat rate suggests. It's also exactly why compounding debt (like credit cards) can grow faster than expected if only minimum payments are made, since unpaid interest gets added to the balance that future interest is calculated on.

Step-by-Step: Compare the Two

1. Enter your principal, annual rate, and time period
2. Check the simple interest result
3. Switch to compound interest and choose a compounding frequency
4. Compare the two totals to see exactly how much compounding adds