Put $5,000 in at 3.5% simple interest for five years and you earn $875. Type your own amount, rate and time below, then switch to compound interest and watch what the extra compounding adds.
What’s the difference between simple and compound interest?
Simple interest is worked out on your starting amount every year, so it adds the same dollars each time. Compound interest is worked out on a balance that keeps growing. Here’s each type on $5,000 at 3.5% for five years.
| Type of interest | Interest | Total | Average per year | Effective rate |
|---|---|---|---|---|
| Simple | $875.00 | $5,875.00 | $175.00 | 3.50% |
| Compound, yearly | $938.43 | $5,938.43 | $187.69 | 3.50% |
| Compound, monthly | $954.71 | $5,954.71 | $190.94 | 3.56% |
Monthly compounding adds $79.71 over the five years. That’s small. Stretch the time and raise the rate, though, and the gap widens fast. Save for ten or twenty years and compounding wins by far more than it does here, which is why the type of interest matters most on long deposits.
How are those numbers worked out?
Start with simple interest. 3.5% of $5,000 is $175 a year, so five years gives $875 and a total of $5,875. You’ll see an average of $175.00 a year printed, which makes sense, because every year pays exactly the same and nothing builds on what came before.
Yearly compounding is different. Year one adds $175, but year two earns interest on $5,175, and so on, until the total reaches $5,938.43 after five years. With monthly compounding, one twelfth of the rate is applied each month, which lifts the total to $5,954.71 and the effective rate to 3.56%.
That effective rate is the number to compare when two accounts quote the same headline rate.
What mistakes should you avoid?
The classic one is treating a simple rate and a compound rate as equals. They aren’t. A 3.5% simple rate stays at 3.5% of the original amount every year, while a 3.5% compound rate earns more each year. The yearly average shown for compound interest is only an average, since the real amounts rise from year to year.
The calculator handles one lump sum, with no extra deposits. It leaves out taxes and doesn’t cover a rate that changes during the term, and daily and quarterly schedules aren’t offered. Planning to add money every month? The compound interest calculator takes regular contributions. If you’re weighing a fixed term deposit that pays at maturity, the GIC calculator is closer to the real product, and there is no harm in running both. To turn a rate into a dollar change, the percentage calculator helps, and the personal loan calculator covers instalment loans.
Where do the numbers come from?
Two formulas inside the calculator produce every result. Simple interest grows in a straight line with time. For compound interest, the tool takes one plus the periodic rate, raises it to the power of the number of periods, then subtracts the starting amount. Nothing is stored, so there’s no rate that can go out of date. And no, we have no connection with the CRA or any government body.
Frequently asked questions
What's the formula for simple interest?
Multiply the amount by the yearly rate as a decimal and by the years. For $5,000, 0.035 and 5 years, that's $875.
How does compound interest differ?
You also earn interest on the interest already added. The same $5,000 at 3.5% for 5 years earns $954.71 when it compounds monthly.
Does monthly or yearly compounding pay more?
Monthly, but only by a little. On $5,000 at 3.5% over 5 years, monthly earns $954.71 and yearly earns $938.43.
What's the effective yearly rate?
It's the single yearly rate that gives the same result as your compounding schedule. A 3.5% rate compounded monthly has an effective rate of 3.56%.
Can I use it for a loan?
Yes, to see how interest builds on a balance you don't repay. If you repay in instalments, use a loan tool instead, because each payment lowers the balance.
Sources and updates
Updated: . How we check rates · Editorial team · Updates
Estimate only. These figures are a planning estimate, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns, and we don't offer tax, legal or accounting services. We have no connection with the Canada Revenue Agency, Revenu Québec or any provincial government. Your real amounts depend on details this tool cannot see, so confirm them with an official source or a qualified professional before you act.