How to Calculate Compound Interest (Formula and Example)
4 min read
Compound interest is interest earned on your interest - the reason savings and investments snowball over time. Albert Einstein supposedly called it the eighth wonder of the world, and the math shows why.
Here is how to calculate compound interest and see how much time and consistency matter.
Step by step
- 1Know the inputs
You need the starting amount (principal), the annual interest rate, how often it compounds per year, and the number of years.
- 2Apply the compound interest formula
A = P x (1 + r/n)^(n x t), where P is principal, r the annual rate as a decimal, n the times it compounds per year, and t the years. 1,000 at 7% compounded yearly for 10 years grows to 1,000 x 1.07^10 = about 1,967.
- 3See the effect of frequency
More frequent compounding earns slightly more. The same 1,000 at 7% compounded monthly for 10 years reaches about 2,010 instead of 1,967.
- 4Add regular contributions
Most people also add money each month. That is where growth really accelerates - use the Compound Interest Calculator to model a starting amount plus monthly deposits over time.
Tips
- Time is the most powerful input - starting early beats contributing more later, thanks to compounding.
- The Rule of 72 estimates doubling time: divide 72 by the rate. At 8%, money doubles in about 9 years.
- Inflation works the same way in reverse, so compare investment returns against it to see real growth.
Frequently asked questions
What is the compound interest formula?
A = P x (1 + r/n)^(n x t), where P is the principal, r the annual rate (decimal), n the compounding periods per year, and t the number of years.
How is compound interest different from simple interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus all previously earned interest, so it grows faster over time.
What is the Rule of 72?
A quick estimate of how long money takes to double: divide 72 by the annual interest rate. At 6%, that is about 12 years.