Simple interest is a method of computing interest where you apply the interest rate only to the original principal amount.
By contrast, with compound interest, you apply the interest rate to the original principal and also to all accumulated interest. You’ll see that in the next section.
You can calculate the simple interest earned or the total amount after interest using these formulas:
Interest = Principal × Rate × Time
Amount = Principal × [1 + (Rate × Time)]
Let’s assume that you have $1,000 that you can invest at 12% annual simple interest. In the first year, you earn 12% of $1,000, or $120. In the second year, you again earn 12% of $1,000, or $120. In the third ...