How it works
This calculator answers a single, practical question: which interest method pays more on the same deposit? You enter one set of inputs—principal, annual rate, and time in years—and the tool runs both calculations in parallel so you can see the dollar difference side by side. That side-by-side framing is the point: rather than learning each method in isolation, you get a direct comparison that shows exactly how much extra compounding earns (or costs) over your chosen period.
The gap between the two methods is small in year one but widens every year after. Understanding why that happens helps you evaluate savings accounts, bonds, certificates of deposit, and loan offers—because the difference between a simple-interest product and a compound-interest product at the same stated rate can amount to hundreds of dollars over a decade.
The formula
Simple Interest = P × r × t
Compound Interest = P × (1 + r)^t − P
Where P is the principal, r is the annual interest rate as a decimal (4% = 0.04), and t is the time in years. The compound formula assumes annual compounding. To find the total balance at the end, add the principal back to the interest earned.
Worked example
You deposit $5,000 at 4% annual interest. Here is how the two methods compare over 1, 5, 10, 15, 20, and 25 years:
| Years | Simple Interest Earned | Simple Balance | Compound Interest Earned | Compound Balance |
|---|---|---|---|---|
| 1 | $200.00 | $5,200.00 | $200.00 | $5,200.00 |
| 5 | $1,000.00 | $6,000.00 | $1,083.26 | $6,083.26 |
| 10 | $2,000.00 | $7,000.00 | $2,400.98 | $7,400.98 |
| 15 | $3,000.00 | $8,000.00 | $4,001.18 | $9,001.18 |
| 20 | $4,000.00 | $9,000.00 | $6,020.64 | $11,020.64 |
| 25 | $5,000.00 | $10,000.00 | $8,329.98 | $13,329.98 |
Notice what happens. In year one both methods earn exactly $200—no difference yet. By year 5, compounding pulls ahead by $83.26. By year 10 the gap is $400.98. By year 25 the compound method has earned $3,329.98 more than simple interest on the same $5,000 at the same 4% rate.
The reason is straightforward: simple interest always earns 4% of the original $5,000, which is $200 every year, forever. Compound interest earns 4% of a growing balance. By year 25 the compound balance is $13,329.98, so that year's interest is roughly $533—more than two and a half times the flat $200 simple interest produces.
Tips
- Check the compounding frequency. This calculator uses annual compounding. Real savings accounts often compound monthly or daily, which increases the gap further. A 4% rate compounded monthly on $5,000 over 25 years earns about $8,598—roughly $268 more than annual compounding.
- Compare apples to apples. When a bank quotes an annual percentage yield (APY), that figure already includes the compounding effect. A 4% APY is not the same as 4% simple interest. Use the APY as your rate input when comparing compound products.
- Short horizons shrink the gap. If you are parking money for under three years, the difference between simple and compound interest is modest. The compounding advantage becomes meaningful over longer stretches.
- Loans work in reverse. Simple interest works in your favour when you borrow, because interest does not pile onto itself. Compound interest on debt—credit cards are the classic example—works against you the same way it works for you on deposits.
- This is an estimate, not professional advice. Real-world returns depend on rate changes, fees, taxes, withdrawal rules, and compounding frequency. Treat the output as a comparison tool, not a guarantee of future earnings.