Compound interest earns interest on your interest. On $10,000 at 5% over 10 years, that one difference is worth an extra $1,470 — for doing absolutely nothing different.
The two formulas, side by side
Simple: you earn interest on the principal only. $10,000 × 5% × 10 years = $5,000 in interest. Total: $15,000.
Compound: each period's interest gets added to the balance, and the next period earns interest on the bigger number. $10,000 at 5% compounded monthly for 10 years = $6,470.09 in interest. Total: $16,470.09.
| Interest earned | Total | |
|---|---|---|
| Simple | $5,000.00 | $15,000.00 |
| Compound (monthly) | $6,470.09 | $16,470.09 |
Why the gap grows with time
Here's the thing most people miss: the gap isn't linear. In year 1, the difference is tiny — about $47. By year 10 it's $1,470. By year 30, simple interest earns $15,000 while monthly compounding earns $34,467 — a $19,467 gap on the same deposit.
That's why every personal finance book screams "start early." Time is the fuel compounding runs on.
Tip: The first few years feel boring. That's normal — compounding is back-loaded. The last 5 years of a 30-year investment do more work than the first 15.
Where you'll meet each one
- Compound: savings accounts, CDs, fixed deposits, investments, credit card debt (working against you).
- Simple: some auto loans, short-term personal loans, a few private lending deals.
If someone offers you "5% interest," always ask: simple or compound — and how often does it compound? The headline number means nothing without those two answers.
See the difference on your numbers
Enter your principal, rate and years — toggle between simple and compound.
Open the interest calculator →Quick answers
Is compound interest always better?
For the saver or investor, yes — it always earns at least as much as simple interest at the same rate, and usually more. For the borrower, it's the opposite: you want simple.
What's the formula for compound interest?
A = P(1 + r/n)^(nt). Principal times one plus the rate divided by compounding periods per year, raised to periods times years.
Can I switch a simple-interest loan to compound?
You can't change the math of an existing loan — but you can refinance or prepay. On the saving side, just move money to an account that compounds.
General information only, not financial advice.