Simple interest is calculated only on the principal amount, which means that the interest earned does not increase over time. For example, if you have a principal of $1000 with a simple interest rate of 5% per year, you will earn $50 each year. In contrast, compound interest is calculated on the principal plus any interest that has already been added to the account. This means that in the same scenario, if you had compound interest, the interest earned in the second year would be calculated on $1050 (the original $1000 plus the $50 earned in the first year), resulting in $52.50 earned in the second year. Over time, this compounding effect can significantly increase the total amount of interest earned, making compound interest a more beneficial option for savings.