Simple Interest: The Same Dollars, Every Period

Before we can see what makes compound interest powerful, we need the plain version it improves on. Start here: simple interest pays the exact same amount every single period.

3 quick questions · about 2 min · no sign-up

Question 1 of 3

You deposit $1,000 at 5% simple interest per year. How much interest do you earn in year 1?

• $50
• $5
• $1,050
• I'm not sure

You said: $50

Exactly. 5% of $1,000 is $50. Simple interest is always a percentage of your original principal — that $1,000 is the only number that ever gets multiplied.

You said: $5

That's 0.5%, not 5%. 5% means 5 per 100, so 5% of $1,000 is $50. The interest is a percentage of your full original principal of $1,000.

You said: $1,050

Close — $1,050 is your balance after year 1, but the interest earned is just $50. 5% of $1,000 = $50; the balance is principal plus that interest.

You said: I'm not sure

It's $50. Simple interest is a percentage of your original deposit: 5% of $1,000 = $50. That principal never changes, so this is the figure we'll watch repeat.

Another way to see it

Another way to see it: 'percent' means 'per hundred.' $1,000 is ten hundreds, and you earn 5 on each hundred — 10 times 5 = $50 a year.

Now the key question: what happens to that $50 figure in year 2?

Question 2 of 3

Same $1,000 at 5% simple interest. How much interest do you earn in year 2?

• $50 again — the same as year 1
• $52.50 — 5% of the new $1,050 balance
• $100 — interest doubles each year
• I'm not sure

You said: $50 again — the same as year 1

Right. Simple interest is always computed on the original $1,000, never on the interest you've already earned. So every year pays a flat $50 — the same dollars, every period.

You said: $52.50 — 5% of the new $1,050 balance

That's the compound interest move, and it's exactly what simple interest does NOT do. Simple interest ignores the $50 already earned and always charges 5% on the original $1,000 — so it's $50 again.

You said: $100 — interest doubles each year

Interest doesn't grow at all here. Simple interest stays fixed at 5% of the original $1,000, which is $50 — the same in year 2 as year 1, not double.

You said: I'm not sure

It's $50 again. Simple interest is always computed on the original $1,000, not on your growing balance — so the payout is a flat, repeating $50 every year.

That flat number repeats forever — so you can jump ahead without adding year by year. Let's prove you can.

Question 3 of 3

Same $1,000 at 5% simple interest. What is the TOTAL interest earned after 3 years?

• $150
• $157.63
• $50
• I'm not sure

You said: $150

Exactly. Each year pays a flat $50, so 3 years is just 3 × $50 = $150. Because the rate always hits the same original principal, you can multiply instead of stacking year on year.

You said: $157.63

That's the compound answer, where interest earns interest. Simple interest never does that — it's a flat $50 per year, so 3 × $50 = $150 exactly.

You said: $50

That's one year. Total interest is the flat $50 added up across all 3 years: 3 × $50 = $150. The yearly amount stays $50, but the total accumulates.

You said: I'm not sure

It's $150. Each year pays the same flat $50, so total interest is simply 3 × $50 = $150. That repeating, multipliable payout is the whole idea of simple interest.

The takeaway

Simple interest always pays a fixed amount each period — 5% of your original $1,000 is $50, and it stays $50 every year because the interest never earns interest. That makes total interest just (yearly amount × number of periods).

Next step

You can now compute simple interest, where every period pays the same dollars on the original principal. Next, we change one rule — let interest earn interest — and watch the numbers diverge.