Simple interest calculation
With the simple interest calculation, interest is paid on the original amount of deposit, year after year. The formula is: Original Dollar Amount x Interest Rate x Length of Time (in years) = Amount Earned.

Example: If you had $100 in a savings account that paid 6% simple interest, you would earn $6 in interest over the first year.


At the end of two years, you would have earned $12. The account would continue to grow at a rate of $6 per year, despite the accumulated interest.

Compound interest calculation
With the compound interest calculation, interest is paid on the original amount of deposit, plus any interest earned.
The formula is: (Original Dollar Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned

Example: If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6 in interest. The calculation the first year would look like this:


With compound interest, the second year you would earn $6.36 in interest. And, by the end of the second year, you would have earned $12.36 in total interest. The calculation the second year would look like this: