Compare simple and compound growth, and separate an assumed growth rate from a promised return.
Educational scenarios, not observed prices, fund performance or investment recommendations. Rates are assumptions and can change.
Sources reviewed: 2026-10-20What it means
Compounding means that earlier growth remains in the balance and can generate later growth. With a constant positive rate, the difference from simple interest becomes larger over time. That mathematical pattern does not make an investment safe or its future rate predictable.
- Principal
- The starting amount to which growth is applied. In this illustration it stays fixed at 1,000 units before any growth.
- Compounding
- Applying growth to a balance that includes earlier growth, instead of only to the original principal.
How the calculation works
Our example starts with 1,000 units, makes no additional deposits and compounds once a year for ten years. Simple growth applies the rate only to the original 1,000. Compound growth applies it to the preceding balance. At 5%, the first year is identical; the difference appears from year two.
Formula
Compound = 1,000 × (1 + r / 100)^10; Simple = 1,000 × (1 + 10 × r / 100)
Try a hypothetical example
Fixed 1,000 units, ten years, annual compounding, no deposits, withdrawals, costs or taxes.
- Simple growth
- 1500.00
- Compound growth
- 1628.89
Fixed reference cases
The file contains the same fixed educational reference cases for everyone. It excludes your search and current example choices.
| Assumption (%) | Reference case | Example case |
|---|---|---|
| 0% | 1000.00 | 1000.00 |
| 2% | 1200.00 | 1218.99 |
| 5% | 1500.00 | 1628.89 |
| 10% | 2000.00 | 2593.74 |
| 15% | 2500.00 | 4045.56 |
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What the example does not show
A quoted annual rate may be nominal or effective, and compounding frequency changes the result. Deposits, withdrawals, fees and taxes also change the path. Volatile market returns do not follow a smooth constant-rate line. Use the savings calculator for a separate monthly-contribution model; do not interpret this illustration as a forecast.
Official educational references
Original explanation and example calculations by FinanceVelix. References support the concepts, not an endorsement of this site.
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https://financevelix.com/en/learn/compound-interest