Simple vs Compound Interest Explained with Real Numbers
See how simple and compound interest grow the same deposit differently over 5, 10 and 20 years, why time matters more than frequency, and how to use the rule of 72.
With simple interest, you earn interest only on the money you put in. With compound interest, each period's interest is added to your balance, and the next period's interest is worked out on that larger total. At first the two look almost the same. Given enough years, they end up far apart.
The formulas
Simple: A = P × (1 + r × t) Compound: A = P × (1 + r ÷ n)^(n × t)
P is the starting amount, r is the yearly rate as a decimal, t is the number of years and n is how many times a year interest is added.
25,000 at 7% a year
| Years | Simple | Compound yearly | Difference |
|---|---|---|---|
| 5 | 33,750 | 35,063.79 | 1,313.79 |
| 10 | 42,500 | 49,178.79 | 6,678.79 |
| 20 | 60,000 | 96,742.11 | 36,742.11 |
After 20 years, compounding has nearly quadrupled the money, while simple interest has only added 140%.
Does monthly compounding make a big difference?
A little. Over 20 years, 25,000 at 7% compounded monthly grows to about 100,968, roughly 4,200 more than yearly compounding. But adding five more years at the same rate does far more than any change in frequency. Time and rate are what really drive growth.
The rule of 72
Divide 72 by the interest rate to estimate how many years it takes to double your money. At 7%, that is about 10.3 years. The exact figure is 10.24 years, so the shortcut is close for everyday rates.
Compounding on debt
The same effect works against you on credit cards and loans. Unpaid interest is added to what you owe, and you then pay interest on it. Paying debts down early stops that snowball.
Tip These figures are examples for learning, not financial advice. Real accounts may have fees, taxes or changing rates.
Try it yourself: Simple & Compound Interest CalculatorSimple, compound and continuous interest side by side, with the effective rate and doubling timeOpen →Common questions
Is simple interest used anywhere today?
Yes, on some car loans, short-term loans and certain bonds.
What is the effective annual rate?
The yearly rate you actually earn once compounding is included. 7% compounded monthly is about 7.23%.
Does the rule of 72 work for high rates?
It becomes less accurate above about 15%, but still gives a rough idea.