The concept of compound interest is not that difficult. During the first year, you would earn interest on the principal. However, in subsequent years, you would not only earn interest on the original principal, but also on the interest earned in the first year. Definitions Compound interest is interest earned on interest. It is calculated not only on the principal investment, but also on the interest that has been generated, which, in effect, becomes part of the principal.
Simple interest is interest calculated on the principal investment only.
Any interest earned, does not become part of the principal. The interest on interest component of the investment is what causes the snowballing effect on the growth of money. The difference between compound and simple interest is, well, simple. When earning simple interest, the investment only earns interest on the original investment. Interest is not earned on interest earned in the previous years.