What’s the Difference Between Simple Interest and Compound Interest?

First Seacoast Bank • March 03, 2025
what is the difference between simple interest and compound interest

Want to manage your money effectively? Understanding the difference between simple and compound interest will get you on your way to that! This knowledge empowers you to make informed decisions about saving, investing, and achieving your financial goals. Let's explore what these concepts are and how they can work for you.

Simple Interest: A Fixed Growth Rate

Simple interest is just that, simple. It’s only calculated on your original deposit, so it doesn’t grow over time. For example, if you put $1,000 into an account with a 5% simple interest rate, you’ll earn $50 a year, nothing more.

While simple interest is easy to understand, it won’t help your savings grow as much as it could. That’s where compound interest comes in.

Compound Interest: Letting Your Money Work for You

Compound interest helps your money grow faster because you earn interest on both your original deposit and the interest you've already earned.

Say you put $1,000 into an account with a 5% compound interest rate. In the first year, you’ll make $50 in interest. But in the second year, interest is calculated on $1,050, so you’ll earn $52.50, and that number keeps increasing. Over time, this snowball effect can make a big difference in your savings.

The Power of Compound Interest in Achieving Financial Goals

Choosing an account that earns compound interest can significantly enhance your savings over time. This aligns with good financial habits, such as:

  • Building an Emergency Fund: Having financial safety is key with life’s unpredictability. Aim to save three to six months' worth of expenses to cover unexpected situations.
  • Saving for Long-Term Goals: Whether you're planning to buy a home or retire comfortably, setting aside money regularly and letting it grow through compound interest can help you reach those big milestones easier.

At First Seacoast Bank, our savings accounts are designed to help your money grow with compound interest. The longer you save, the more your balance can build over time. If you want to maximize your savings, think about opening an account that takes advantage of compound interest. Here are some of the options we offer:

  • Statement Savings Account: Start saving with confidence and enjoy the convenience of online and mobile banking to manage your funds anytime, anywhere.
  • Certificates of Deposit (CDs): For those looking to save for specific goals like education or retirement, our CDs offer competitive rates with terms ranging from 91 days to five years.
  • Money Market Accounts: Earn higher interest rates while maintaining easy access to your funds. Our Money Market Accounts provide a balance between growth and flexibility.

Ready to Start Earning? Open a Savings Account Today!

By understanding the power of compound interest, you can make smarter financial decisions. If you're ready to start growing your savings with a First Seacoast Bank account, explore our options and see how easy it is to start earning. Let's make this year the one where your savings start working as hard as you do.

For more tips on managing your money and reaching financial wellness, visit our Financial Literacy Hub. Remember, financial literacy is a journey, and understanding concepts like simple and compound interest is a significant step toward financial empowerment.