Simple Interest vs. Compound Interest – And Why It Matters for Your Money

By Prince Gandomessi

Let’s say you plant two money trees.

One grows the same number of dollars every year. That’s simple interest. The other tree grows more dollars each year—because the leaves from last year grow their own money leaves. That’s compound interest.

Now, let’s break that down in real numbers so you really get it.

What Is Simple Interest?

Simple interest means you only earn money on your original amount—the money you first saved or invested.

Let’s say you have $100 and earn 10% simple interest every year.

After 1 year: you have $110

After 2 years: $120

After 3 years: $130

After 10 years: $200

The interest never changes. It stays the same every year. It’s simple. Easy. But also... limited.

What Is Compound Interest?

Now let’s take that same $100, but this time you earn 10% compound interest.

That means you earn interest on your original money plus all the interest you already earned.

After 1 year: $110

After 2 years: $121

After 3 years: $133.10

After 10 years: $259.37

See the difference? With compound interest, your interest starts earning interest.

The longer you leave it alone, the faster it grows.

Why This Matters: Inflation Is Stealing Your Money

Right now, inflation is around 3%. That means your money loses value if it’s just sitting there.

Think of it like this:

If your savings only grow at 1%, but prices go up at 3%, you’re actually losing money.

If your savings grow at 3%, you're just keeping up.

But if your savings grow at 6%, 8%, or even 10%, now you’re gaining ground.

That’s where knowing the interest rate matters.

It’s not enough to just save. You need your money to grow faster than inflation. Compound interest helps make that happen.

How the Rule of 72 Helps

Here’s a quick shortcut: the Rule of 72.

It shows how fast your money will double.

Just take 72 divided by your interest rate.

At 3% (just keeping up with inflation), your money doubles in 24 years.

At 6%, it doubles in 12 years.

At 12%, it doubles in 6 years.

The faster your money doubles, the stronger your financial future.

Final Thought

Here’s the bottom line:

Simple interest is like getting the same paycheck every year.

Compound interest is like getting a raise every year—and your raises get bigger and bigger.

If you want to beat inflation, build wealth, and create freedom for your future—you’ve got to let your money grow smarter, not just sit still.

Start early. Let it grow. And always know what kind of interest you’re earning.

That one lesson can change your life.