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How It Works
Simple interest charges a flat rate on the original principal each period. Compound interest adds earned interest back to the principal, so subsequent interest is calculated on a growing balance. The more frequently compounding occurs, the faster money grows.
This calculator supports both methods. Enter the interest rate as a decimal (e.g., 0.05 for 5%) and choose the number of compounding periods per year for compound interest.
Example Problem
You deposit $10,000 at 5% annual interest for 3 years.
- Simple: A = $10,000 × (1 + 0.05 × 3) = $11,500
- Compound (monthly): A = $10,000 × (1 + 0.05/12)36 = $11,614.72
Compounding monthly adds an extra $114.72 over simple interest on the same deposit.
Frequently Asked Questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus previously earned interest. Over 20 years at 6%, $10,000 grows to $22,000 with simple interest but $32,071 with monthly compounding.
How often should interest compound?
More frequent compounding (daily vs. annually) produces slightly higher returns. Monthly compounding (q=12) is the most common for savings accounts. The difference between monthly and daily compounding is usually small.
What is APY vs. APR?
APR is the stated annual rate. APY (annual percentage yield) includes the effect of compounding. A 5% APR compounded monthly gives an APY of about 5.12%. APY is always equal to or higher than APR.
Related Calculators
- Compounding & Discount Factors Calculator — time value of money factors.
- Rule of 72 Calculator — quick estimate of investment doubling time.
- Loan Calculator — apply interest rates to loan amortization.
- Inflation Rate Calculator — understand how inflation erodes real interest returns.
- Mortgage Loan Calculator — see how interest rate changes affect monthly payments.
Reference: Brealey, R., Myers, S., & Allen, F. Principles of Corporate Finance. McGraw-Hill Education.