The Fundamental Difference
When you save or invest money, two math rules decide your future wealth: simple interest and compound interest. They start from the same principal, but over time they create completely different results.
- Simple Interest: You earn interest only on your original principal. Growth is steady and flat. Formula: FV = P × (1 + r × n)
- Compound Interest: You earn interest on principal + accumulated interest. Growth speeds up over time. Formula: FV = P × (1 + r)ⁿ
40-Year Comparison: $100,000 at 5%
| Years | Simple | Compound | Difference |
|---|---|---|---|
| 10 | $150,000 | $162,889 | +$12,889 |
| 20 | $200,000 | $265,330 | +$65,330 |
| 30 | $250,000 | $432,194 | +$182,194 |
| 40 | $300,000 | $703,999 | +$403,999 |
In 10 years the gap is small. By 20 years, compound pulls far ahead. By 40 years, compound delivers more than twice the wealth.
Where Each Applies
- Bank savings accounts: Mostly simple interest — rarely builds serious wealth
- Stocks & index funds: Compound (returns reinvested) — powerful long-term growth
- Credit cards: Compound works against you — debt can spiral fast