Compound vs. Simple Interest (Numeric Examples)

Simple Interest is calculated only on the original principal amount. The formula is Interest = P * r * t, so the total amount is A = P(1 + rt).

Compound Interest is calculated on the principal *and* the accumulated interest.

Let's use an example: P = $1,000, r = 5% (0.05), t = 10 years.

After 10 years, compounding earned an extra $128.89 because the interest itself was earning interest.