What it is
This calculator compares the earnings you would receive when investing a lump sum under two different interest regimes: simple versus compound interest. It takes the initial capital, nominal annual rate, chosen compounding frequency and investment horizon in years to produce two separate earnings totals. The simple scenario assumes interest accrues linearly without reinvestment; compound assumes periodic reinvestment according to the frequency you select.
Understanding the comparison tells investors how much incremental profit a compounding strategy can generate, guiding decisions on whether a higher-fee account (often tied to more frequent compounding) justifies its cost.
How to use it
Enter your starting principal in dollars. Input the nominal annual interest rate as a percentage. Pick the number of times per year that interest will be compounded – options range from yearly to daily. Specify for how many years you plan to hold the investment. The dashboard will instantly display the earnings from simple interest, the earnings if interest is compounded at your chosen frequency and the dollar difference between the two.
Interpret the outputs: Simple earnings show what you would earn if the rate were applied only once each year. Compound earnings include all reinvestment effects; the larger this number relative to simple, the more benefit from frequent compounding.
Worked example
Start with a principal of $10,000 and an annual nominal rate of 5 %. With monthly compounding (n = 12) over five years (t = 5), the simple interest earned is: $10,000 × 0.05/100 × 5 = $2,500. For compound interest we compute the periodic rate r/(100·n) = 0.05/1200 ≈ 0.000041667 and add one: 1+… ≈ 1.000041667. Raising this factor to the n·t power (12×5 = 60) gives a growth multiplier of about 1.283359. Multiplying that by the principal yields a final balance of roughly $12,833.587. Subtracting the initial $10,000 gives compound earnings of $2,833.587. The difference between compound and simple earnings is therefore $333.587, illustrating the incremental benefit of monthly compounding over the five‑year horizon.
Inputs
- Initial Investment: 10000
- Annual Interest Rate (%): 5
- Compounding Frequency: 12
- Investment Period (Years): 5
Result
- Simple Interest Earnings: 2500
- Compound Interest Earnings: 2833.587
- Difference (Compound – Simple): 333.587
Frequently asked questions
Why does my compounded return sometimes exceed my simple return by a large margin?
Because in the compound formula each period’s earned interest is added to the principal for subsequent calculations. Over multiple years the reinvested earnings generate additional earnings—this effect becomes more pronounced with higher rates or longer horizons.
What if I choose "Yearly" compounding? Does it change anything compared to simple interest?
Choosing yearly compounding uses the same rate once per year, which mathematically yields exactly the same result as a simple interest calculation when the nominal rate equals the effective rate. The calculator therefore shows identical earnings for both scenarios in that particular case.