Compound Interest vs Simple Interest: Which Is Better?
Understanding the difference between compound and simple interest helps you choose better savings and investment options.
Simple interest
Simple interest is calculated only on the original amount. It grows at a constant rate over time.
Compound interest
Compound interest is calculated on both the initial amount and the accumulated interest, making your money grow faster.
Example
Suppose you invest $10,000 at 5% for 10 years:
Simple interest:
Interest = $10,000 × 5% × 10 = $5,000
Final amount = $15,000
Compound interest:
Final amount ≈ $16,288.95
Interest earned ≈ $6,288.95
Difference = $1,288.95 more with compound interest.
Which is better?
Compound interest is usually better because it accelerates growth over time.
Related guides
Read our compound interest example and compound interest formula guide.
Key takeaway
Compound interest grows your money faster, especially over longer periods.