Simple interest

Simple interest is interest calculated only on the original starting amount — called the principal — and not on any interest that has already been earned. Each period (usually a year) earns the same dollar amount of interest, producing a straight-line growth pattern rather than the accelerating curve of compounding.

The formula

Interest = Principal × Rate × Time

A rate is expressed as a decimal (5% becomes 0.05), and time is the number of periods (usually years) at that rate.

Example

A $500 starting amount at 5% annual simple interest over 10 years:

• Year 1: earns $25 → balance $525
• Year 2: earns $25 → balance $550
• Year 3: earns $25 → balance $575
• Year 10: earns $25 → balance $750

Total interest earned: $250. The balance grew in equal yearly steps — the hallmark of simple interest.

Why it matters (and where it differs from compound interest)

Simple interest is a clean way to introduce the idea that money can grow by itself. It is deliberately simple and makes the shape of year-by-year growth easy to see. But compound interest — which earns interest on previously earned interest as well — grows faster over long timeframes, and is what most real-world savings products actually use.

The contrast is the teaching moment: the same $500 at 5% compound interest over 10 years reaches about $814, versus $750 under simple interest. The $64 difference looks small at ten years but widens dramatically at twenty or thirty — the core reason starting to save early pays off disproportionately.

Where simple interest still appears

Not every product compounds. Some short-term loans, certain bonds, and some introductory products quote simple interest. Always check which is being used before comparing two offers — two “5% interest” rates that differ in compounding can produce materially different outcomes across the life of a savings goal. Use the simple interest explainer to see the year-by-year growth and explore the concept visually.