Why Compound Interest Beats Simple Interest — and the Rule of 72
Simple vs. compound interest — the core difference
Simple interest accrues only on the original principal, so the interest paid out each year is identical. Compound interest instead treats the running total — principal plus everything earned so far — as the new base for the next calculation, creating a snowball where interest itself starts generating more interest. The gap looks tiny in the first few years, but it grows into something impossible to ignore the longer the money stays invested.
Worked example — 10,000,000 KRW at 4%/yr for 10 years
| Method | Amount after 10 years | Growth |
|---|---|---|
| Simple interest | 14,000,000 원 | 4,000,000 원 |
| Compound (pre-tax) | 14,802,443 원 | 4,802,443 원 |
Simple interest adds the same 10,000,000 × 4% = 400,000 KRW every year for 10 years, totaling 14,000,000 KRW. Compound interest computes 10,000,000 × 1.0410, reaching 14,802,443 KRW — 802,443 KRW more than simple interest at the same rate and term. That gap comes entirely from interest being reinvested each year.
The Rule of 72 — a quick way to estimate the doubling point
The Rule of 72 estimates doubling time in your head as "72 ÷ annual rate (%)". At 4%, that’s 72 ÷ 4 = 18 years. Computing it precisely with logarithms (ln 2 ÷ ln 1.04) gives the exact doubling point as 17.7 years — only about 0.3 years off from the shortcut. The rule stays especially accurate at lower rates (roughly 6–10% or below), making it handy for a quick gut check, but for decisions that matter, use an actual calculator or the logarithmic formula instead.
What changes with monthly contributions instead of a lump sum
The example above assumes a lump sum invested once and left alone. Contributing a fixed amount monthly instead means earlier contributions compound for longer while later ones compound for less time, so the same total amount contributed yields a smaller final return than a lump sum. On the other hand, monthly contributions let you start before you have a lump sum saved up — so which approach makes sense in practice depends on when and how much you’re actually able to set aside.
What you actually keep after the 15.4% interest income tax
Interest earned on deposits and savings is taxed at a withheld 15.4% (14% national + 1.4% local, per the National Tax Service). Applying that to the 4,802,443 KRW of interest from the compound example above gives a tax of 739,576 KRW, leaving a net total of 14,062,867 KRW including principal. It’s worth planning around this gap between the pre-tax figure and what actually lands in your account.
Why starting early matters so much
Because compounding makes time itself part of the return, starting a few years earlier with the same amount and rate has an outsized effect on the final total. In the example above, 10,000,000 KRW compounded for 10 years at 4%/yr grew to 14,802,443 KRW — but starting 5 years earlier and compounding for 15 years under the same terms grows the total not linearly but exponentially relative to the principal. Conversely, starting 5 years later and compounding for only 5 years means fewer rounds of interest getting reinvested, so the compounding effect is far weaker. How much you contribute matters, but when you start is just as decisive. Also note the figures above are nominal, not adjusted for inflation — to judge purchasing-power terms, subtract the inflation rate to get the real return.
Related guide
To run the numbers with your own principal, rate and term, try the compound interest calculator; to check pre- and post-tax interest on a monthly savings plan, use the savings interest calculator. The figures above use tax rates current as of 2026-07-19; the interest income tax rate and related rules can change, so verify the exact after-tax amount against National Tax Service materials.