Simple vs compound interest on $10,000 at 5% for 10 years
$10,000 at 5% for 10 years becomes $15,000 with simple interest and $16,289 with compound interest, so compounding adds $1,289.
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The numbers for these inputs
| Year | Simple | Compound | Difference |
|---|---|---|---|
| 1 | $10,500 | $10,500 | $0 |
| 2 | $11,000 | $11,025 | $25 |
| 3 | $11,500 | $11,576 | $76 |
| 4 | $12,000 | $12,155 | $155 |
| 5 | $12,500 | $12,763 | $263 |
| 6 | $13,000 | $13,401 | $401 |
| 7 | $13,500 | $14,071 | $571 |
| 8 | $14,000 | $14,775 | $775 |
| 9 | $14,500 | $15,513 | $1,013 |
| 10 | $15,000 | $16,289 | $1,289 |
How it works
Simple interest is calculated on the original amount only: balance = amount x (1 + rate x years). Every year earns the same interest.
Compound interest is calculated on the balance, which includes interest already earned: balance = amount x (1 + rate)^years. The gain grows each year, which is why the two lines pull apart over time.
Here the compound figure is compounded once a year. Monthly or daily compounding gives a slightly higher result at the same rate.
Common mistakes
- Assuming the two are similar over short periods and long ones: after one year they are identical, after 30 years they are far apart.
- Comparing a simple rate with a compound rate as if they were the same kind of number.
- Forgetting that loans usually compound against you: the same effect works on debt.
Questions
Which is better, simple or compound interest?
For the person earning it, compound: it gives $1,289 more on these numbers. For a borrower, simple interest costs less.
What is the formula for each?
Simple: amount x (1 + rate x years). Compound: amount x (1 + rate)^years, compounded yearly in this calculator.
How much interest is earned in total on $10,000?
$5,000 with simple interest and $6,289 with compound interest.
Does the gap always grow?
Yes, as long as the rate is above zero. The difference is zero in year one and increases every year after, faster at higher rates.
More simple vs compound interest examples
- Simple vs compound interest on $10,000 at 5% for 30 years
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- Simple vs compound interest on $100,000 at 3% for 10 years
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