Compound vs simple interest: what's the difference?
Simple interest is paid on your original amount; compound interest earns on your interest too. Why it matters over time.
Last updated 3 November 2026
The difference between simple and compound interest sounds like fine print, but over years it’s the difference between money that grows in a straight line and money that snowballs. Here’s the distinction, with numbers.
Simple interest
Simple interest is paid only on your original amount — the principal. It never changes year to year.
- Formula: interest = principal × rate × years
- Example: $10,000 at 5% for 10 years → $10,000 × 0.05 × 10 = $5,000 interest, for a $15,000 total.
Compound interest
Compound interest is paid on the principal plus the interest already earned. Each period you earn interest on a slightly bigger balance — interest on your interest.
- Formula: total = principal × (1 + rate)periods
- Example: $10,000 at 5% compounded yearly for 10 years → $10,000 × 1.0510 ≈ $16,289, so about $6,289 interest.
Same deposit, same rate, same 10 years — but compound interest earns about $1,289 more than simple. Stretch it to 30 years and the gap becomes enormous: simple gives $25,000, compound gives about $43,219.
Why compounding frequency matters
The more often interest is added, the sooner it starts earning more interest. Taking that same $10,000 at 5% over 10 years:
- Yearly compounding → about $16,289
- Monthly compounding → about $16,470
The difference is modest at these numbers, but it grows with larger balances, higher rates and longer time frames.
The real lesson: time
Compounding rewards time more than anything. The longer your money compounds, the more the curve bends upward — which is exactly why starting to save or invest early matters far more than the size of each deposit. It’s also why debt that compounds against you is so costly.
Model your own savings — any rate, timeframe, regular deposits and compounding frequency — with our compound interest calculator.
Work out your own numbers
Frequently asked questions
What is the difference between compound and simple interest?
Simple interest is calculated only on your original amount (the principal). Compound interest is calculated on the principal plus the interest already added, so you earn interest on your interest. Over time, compound interest grows noticeably faster.
How do you calculate simple and compound interest?
Simple interest = principal × rate × years. Compound interest = principal × (1 + rate) raised to the number of periods, minus the principal. For $10,000 at 5% over 10 years: simple interest is $5,000; annual compound interest is about $6,289.
Does compounding frequency matter?
Yes, a little. The more often interest is added — daily, monthly, quarterly — the more you earn, because interest starts earning interest sooner. $10,000 at 5% for 10 years grows to about $16,289 compounded yearly, or about $16,470 compounded monthly.
Where do I see simple vs compound interest in real life?
Most savings accounts, term deposits and investment returns compound. Compound growth is why starting to save early matters so much. Some short-term loans and older products use simple interest, where the interest doesn't snowball.