One scenario, two outcomes
Start with $100,000, use a 12% annual rate, and run the model for five years. In withdrawal mode, Money Stack calculates $60,000 of interest while principal remains $100,000. With monthly reinvestment, ending capital is $181,670. The rate is identical; the calculation base is not.
| Method | Interest is earned on | Does interest enlarge the next base? |
|---|---|---|
| Simple interest | Original principal | No |
| Compound interest | Principal plus retained returns | Yes |
The formulas
Simple: A = P × (1 + r × t)
Compound: A = P × (1 + r / n)^(n × t)
P is principal, r is the annual rate as a decimal, t is years, and n is compounding periods per year. These formulas assume a constant rate and omit taxes, fees, withdrawals, and risk.
Common mistakes
- Adding annual percentages instead of multiplying period growth.
- Calling a volatile expected return an interest rate or guarantee.
- Comparing a cash-distribution product with an accumulating product only by headline rate.
- Treating contributions as investment profit.
Reproduce the example
Set starting capital to 100,000, annual rate to 12%, horizon to five years, and costs to zero. Toggle between Withdraw and Reinvest. Compare both the interest total and ending capital: they answer different questions.
The SEC's Investor.gov compound-interest explainer provides an independent definition. This article explains arithmetic, not a particular deposit, security, or expected return.