How to Calculate Compound Interest
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It's one of the most powerful concepts in finance.
Compound Interest Formula
A = P × (1 + r/n)^(n×t)
Where:
- A = Final amount (principal + interest)
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- n = Number of compounding periods per year
- t = Time in years
Step-by-Step:
- 1
Identify your values
Determine P, r, n, and t from your investment details.
- 2
Divide the rate
Divide the annual rate r by n (compounding frequency).
- 3
Calculate the exponent
Multiply n by t to get total compounding periods.
- 4
Apply the formula
Compute (1 + r/n)^(nt), then multiply by P.
Worked Examples:
5-year savings deposit
Principal: $10,000Rate: 6%Compounding: MonthlyTime: 5 years
Result: $13,488.50
A = 10000 × (1 + 0.06/12)^(12×5) = $13,488.50
10-year investment
Principal: $5,000Rate: 8%Compounding: QuarterlyTime: 10 years
Result: $10,955.62
A = 5000 × (1 + 0.08/4)^(4×10) = $10,955.62