Simple vs. Compound Interest Calculator
Calculator Inputs
Annually (1)
Semi-Annually (2)
Quarterly (4)
Monthly (12)
Weekly (52)
Daily (365)
Results
Enter values above and click "Calculate".
Understanding Simple vs. Compound Interest
Interest is the cost of borrowing money or the return on an investment. Understanding how it's calculated is crucial for managing your finances effectively. The two primary types of interest calculation are Simple Interest and Compound Interest. While both involve earning interest, their growth patterns differ significantly over time, with compound interest typically leading to much greater wealth accumulation.
Simple Interest
Simple interest is calculated only on the initial principal amount. It does not account for any interest earned in previous periods being added to the principal for future calculations. This means the interest earned each period remains constant.
Formula:
$A = P (1 + rt)$
Where:
- $A$ = the future value of the investment/loan, including interest
- $P$ = the principal investment amount (the initial deposit or loan amount)
- $r$ = the annual interest rate (as a decimal)
- $t$ = the time the money is invested or borrowed for, in years
The interest earned can be calculated as $I = P \times r \times t$.
Compound Interest
Compound interest is calculated on the initial principal amount and also on the accumulated interest from previous periods. This is often referred to as "interest on interest." The more frequently interest is compounded, the faster your money grows.
Formula:
$A = P (1 + \frac{r}{n})^{nt}$
Where:
- $A$ = the future value of the investment/loan, including interest
- $P$ = the principal investment amount (the initial deposit or loan amount)
- $r$ = the annual interest rate (as a decimal)
- $n$ = the number of times that interest is compounded per year
- $t$ = the time the money is invested or borrowed for, in years
The interest earned is $I = A – P$.
Key Differences and Use Cases
- Growth Rate: Simple interest grows linearly, while compound interest grows exponentially. Over longer periods, compound interest significantly outperforms simple interest.
- Investments: Compound interest is the powerhouse behind long-term investing, such as in retirement accounts (401(k)s, IRAs), stocks, and bonds. The earlier you start investing, the more time compounding has to work its magic.
- Loans: While investments benefit from compounding, for borrowers, frequent compounding on loans (like credit cards or some mortgages) can increase the total amount paid significantly.
- Savings Accounts: Many savings accounts offer compound interest, though often at lower rates and frequencies than investment vehicles.
This calculator helps you visualize the difference in returns between simple and compound interest, empowering you to make informed financial decisions.
';
outputHTML += '
';
outputHTML += 'Simple Interest
'; outputHTML += 'Total Amount: $' + simpleTotalAmount.toFixed(2) + ''; outputHTML += 'Interest Earned: $' + simpleInterestEarned.toFixed(2) + ''; outputHTML += '';
outputHTML += '
';
resultDiv.innerHTML = outputHTML;
}
function getCompoundingFrequencyName(frequency) {
switch(frequency) {
case 1: return "Annually";
case 2: return "Semi-Annually";
case 4: return "Quarterly";
case 12: return "Monthly";
case 52: return "Weekly";
case 365: return "Daily";
default: return "Custom";
}
}