What is simple interest?

Simple interest is calculated only on the original principal. The formula is: Interest = Principal × Rate × Time. A $10,000 investment at 7% simple interest earns $700 per year, every year, for a total of $21,000 in interest over 30 years. The principal never changes, so neither does the annual interest earned.

What is compound interest?

Compound interest is calculated on the principal plus all previously accumulated interest. Each period's interest becomes part of the new base, so the interest earned grows over time. The formula is: A = P × (1 + r/n)^(nt). At 7% compounded monthly, a $10,000 investment grows to approximately $81,165 after 30 years — $71,165 in total interest compared to $21,000 with simple interest.

Compound vs Simple Interest: Why the Gap Grows Over Decades

Simple interest earns returns only on the original principal. Compound interest earns returns on the principal plus all previously accumulated interest. That one difference produces dramatically different outcomes over time.

Simple interest: the straightforward version

Simple Interest = Principal × Rate × Time

Example: $10,000 at 7% simple interest for 30 years → Interest = $10,000 × 0.07 × 30 = $21,000. Ending balance = $31,000. The $700 earned in year one equals the $700 earned in year thirty — the base never grows.

Compound interest: returns on returns

A = P × (1 + r/n)^(n × t)

Example: $10,000 at 7% compounded monthly for 30 years → A = $10,000 × (1 + 0.07/12)^(360) ≈ $81,165. Total interest: $71,165 — more than three times the simple interest result of $21,000.

The growing gap over time

Year 1: compound advantage = $23
Year 5: compound advantage = $676
Year 10: compound advantage = $3,097
Year 20: compound advantage = $16,387
Year 30: compound advantage = $50,165

The advantage of compounding is negligible in year one and modest by year five. By year 30 it is $50,165 — five times the original investment. This is the exponential nature of compounding: the curve accelerates as the base grows.

Which investments use compound interest?

Most investments grow using compound principles: stocks when dividends are reinvested, ETFs and mutual funds with reinvested distributions, high-interest savings accounts (HISA), and GICs with compound interest options. Bonds that pay regular coupon payments without reinvestment behave more like simple interest unless the coupons are reinvested.

TFSA and RRSP accounts in Canada shield compound growth from taxation, amplifying the compound advantage.

Frequently asked questions

What is simple interest?: Simple interest is calculated only on the original principal. The formula is: Interest = Principal × Rate × Time. A $10,000 investment at 7% simple interest earns $700 per year, every year — the principal never changes, so neither does the annual interest earned.
What is compound interest?: Compound interest is calculated on the principal plus all previously accumulated interest. Each period's interest becomes part of the new base. At 7% compounded monthly, a $10,000 investment grows to approximately $81,165 after 30 years — $71,165 in total interest compared to $21,000 with simple interest.
Which investments use compound interest?: Most investments grow using compound principles: stock dividends reinvested, ETFs and mutual funds with reinvested distributions, GICs with compound interest, and savings accounts where interest is credited and reinvested.

Use the free compound interest calculator to see the curve with your own numbers. Related: why monthly contributions accelerate growth, inflation-adjusted returns, how investment fees erode wealth.