Simple Interest vs Compound Interest
Last updated: June 2026
The key difference
Simple interest applies only to the original principal, so it grows in a straight line. Compound interest applies to the principal plus all the interest earned so far, so it accelerates. On savings, compounding is your friend; on debt, it works against you.
The formulas
- Simple: Interest = P × r × t.
- Compound: A = P × (1 + r ÷ n)^(n × t), where n is the number of compounding periods per year.
A worked example
$10,000 at 7% for 20 years:
- Simple interest: 10,000 × 0.07 × 20 = $14,000 of interest → balance $24,000.
- Compound interest (annual): 10,000 × 1.07²⁰ ≈ $38,697 → about $28,700 of interest.
Same rate, same starting amount — but compounding earns roughly twice the interest over 20 years. The longer the horizon, the wider the gap.
The rule of 72
To estimate how long compounding takes to double your money, divide 72 by the rate. At 7%, that's 72 ÷ 7 ≈ 10 years. It's a quick mental check that simple interest can't match, because simple interest never compounds.
Why it matters
- Saving: start early — extra years of compounding can outweigh larger later contributions.
- Borrowing: unpaid interest that compounds (like on credit cards) makes debt grow fast, so clear it quickly.
Use the calculator
Put these ideas to work with the Compound Interest Calculator. You can also browse all MoneyCalcKit calculators or read the calculator methodology for formulas and assumptions.
Frequently asked questions
What's the difference between simple and compound interest?
Simple interest is charged only on the original principal and grows linearly. Compound interest is charged on principal plus accumulated interest, so it accelerates.
Which earns more for savers?
Compound interest, always — and the gap widens the longer the money is invested. This is why starting early matters so much.
What is the rule of 72?
Divide 72 by the interest rate to estimate the years for compound interest to double your money. At 7%, that's about 10 years.