Put $5,000 away at 3.5% for five years and simple interest pays $875, for a total of $5,875. Compounded monthly, the same money earns $954.71. Compounded yearly, it earns $938.43. Pick the type of interest above and enter your own numbers.
Simple interest
Simple interest is paid only on the starting amount. The formula is amount times rate times years, and the result is the same every year: $175 a year on $5,000 at 3.5%. Some short-term loans work this way. So do certain deposits.
Compound interest and the effective rate
With compounding, each period’s interest joins the balance, so later interest is figured on a larger amount. The gap with simple interest widens over time. In the example above, monthly compounding earns $79.71 more over five years.
The effective rate shows real yearly growth. For 3.5% compounded monthly it is 3.56%. A savings account that advertises a rate should show the effective rate too, which lets you compare accounts fairly.
Savings accounts
Most Canadian savings accounts calculate interest daily and add it monthly. Watch out for promotional rates. They often drop after a few months. Before moving money, check the ongoing rate, any fees and the minimum balance.
Interest on debt
On loans and credit cards, interest works against you in the same way. Cards often compound daily at high rates, so balances can grow quickly. Paying more than the minimum each month cuts the interest a great deal, and it shortens the debt too.
If a lender quotes simple interest on a loan, multiply the amount, the rate and the years to check it. If the quote is much higher, ask how the interest is charged. Interest on unpaid card balances compounds daily, so the cost grows faster than a simple calculation shows.
Tax on interest
Interest earned outside a registered account is taxable income, even when the amount is small, so report it on your return. A TFSA or an RRSP shelters interest from tax. The TFSA calculator shows the room you have.
Testing a rate you are offered
Enter the amount, the years and the rate, then compare the total with another account. Half a point on $5,000 is small in a year. Stretched over a longer period, the difference grows into real money. Read the fine print.
Short terms and partial years
For a period under a year, enter it as a fraction. Six months is 0.5 years. A 90-day term is about 0.25. Simple interest on a short loan, such as a bridge loan or a short deposit, is often figured this way. Check the lender’s day-count rule for exact figures.
Interest against inflation
A savings rate below inflation loses buying power even as the balance grows. If a 3.5% account meets 3% inflation, the real gain is about half a point. Weigh the rate you earn against the growth in prices when you choose where to keep your money.
Where to go next
For long-term growth with regular deposits, use the compound interest calculator. Term deposits can be compared in the GIC calculator. Borrowing costs are covered by the personal loan calculator.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is paid on the starting amount only. Compound interest is also paid on earlier interest.
How do I calculate simple interest?
Multiply the amount by the yearly rate and by the number of years.
How much is $5,000 at 3.5% for five years?
$875 in simple interest, or $954.71 compounded monthly.
What is the effective yearly rate?
The actual yearly growth once compounding is counted.
Is interest income taxable?
Yes, outside a TFSA or RRSP.
Does interest work the same on loans?
Yes. It builds against you when you borrow.
Sources and updates
Last reviewed: . Full disclaimer. How we build calculators. Editorial policy.
Estimate only. This calculator gives general information for planning. It is not tax, legal or financial advice, and it is not affiliated with the City of Toronto, MPAC or the Canada Revenue Agency. Results depend on the numbers you enter and may differ from official amounts. Check official sources or a qualified professional before you decide.