What Is the Difference Between Compound and Simple Interest?
Compound interest is interest earned on both principal and previously earned interest; simple interest is earned on principal only. Using this page's assumptions (7% for 20 years), the compound estimate is about $124,379, with $71,379 from interest. The comparison table below contrasts the two models with the same inputs so the difference is easy to extract. Figures are hypothetical educational estimates, not a forecast of actual returns.
Scenario snapshot
Preloaded assumptions and the estimated result. The calculator below can change every input.
| Initial investment | $5,000 |
|---|---|
| Monthly contribution | $200 |
| Time horizon | 20 years |
| Assumed annual return | 7% |
| Compounding | monthly |
| Estimated ending balance | $124,379 |
| Total contributions | $53,000 |
| Estimated interest | $71,379 |
after 20 years • 7.0% return • $200.00/month • $5,000.00 initial
The comparison below estimates the impact of delaying the start date, using the same assumptions and timeline.
Stress-test growth assumptions in the Scenario Lab to see a range of outcomes and potential risk.
Open Scenario LabCompound interest vs simple interest
Same inputs; two interest methods. Bottom line: compounding credits interest on prior interest, so the estimated balance is higher over long horizons.
| Criterion | Compound | Simple |
|---|---|---|
| Interest is earned on | Principal plus previously earned interest | Principal only |
| Growth path | Accelerates as the balance grows | Stays roughly linear |
| Estimated balance after 20 years | $124,379 | $93,460 |
| Estimated interest | $71,379 | $40,460 |
| Typical use in this calculator | Default growth model for the scenarios | Shown for contrast, not as a forecast |
What is the difference between compound interest and simple interest?
Compound interest adds each period's interest to the balance, so later interest is calculated on a larger amount. Simple interest keeps the interest base closer to principal, so growth stays nearer to a straight line. In the worked example, compounding estimates $124,379 after 20 years at 7%. The table on this page holds every other input constant so the difference is attributable to the interest method.
Why does the gap widen over longer time horizons?
The compounding gap is usually modest in the first few years because little interest has accumulated yet. Over longer horizons, interest-on-interest can become a large share of the ending balance, which is why 20- and 30-year comparisons look more dramatic than 5-year ones. This example's interest share is about 57% of $124,379.
How can this calculator compare the two models?
Switching the calculator between monthly and annual compounding, or adjusting the horizon, is a way to see how sensitive the gap is to time and frequency. Neither model includes taxes, fees, or variable market returns. The comparison is for understanding the math, not for selecting an investment product.
Summary
The comparison is meant to make the compounding difference concrete: same inputs, two interest methods, two ending estimates. Related pages in this hub apply the compound model to monthly contribution and lump-sum scenarios. None of the figures are a forecast of market returns.