Compound Interest vs. Simple Interest Explained

• Simple interest: total = P × (1 + r × t). $10,000 at 5% earns $500 every year, no matter how long you wait.
• Compound interest: total = P × (1 + r/n)^(n × t), where n is how many times a year interest is added. Each period's interest is added to the balance and earns interest itself.

After 30 years, compounding has earned $34,677 in interest against $15,000 for simple interest, more than twice as much. Notice that the jump from yearly to monthly compounding is about $1,458, and from monthly to daily only about $135. How often interest compounds matters much less than how long you leave it.

Divide 72 by the yearly rate to estimate how many years compounding takes to double your money. At 6% that is 12 years (exact answer 11.9). At 9% it is 8 years. Simple interest at 6% takes 16.7 years to double, because nothing compounds.

• Savings accounts, CDs and investment growth compound, usually daily or monthly.
• Credit cards compound daily, which is why an unpaid balance grows quickly.
• Most car loans and mortgages charge interest on the remaining balance each month. Because you pay that interest every month, it does not pile up on itself the way savings interest does.
• Some short-term personal loans and bonds pay simple interest.

When comparing savings accounts, look at the APY, which already includes compounding. When comparing loans, look at the APR.