How to Calculate Compound Interest Step by Step

Compound interest means your interest starts earning interest. It is the engine behind long-term savings, fixed deposits, retirement accounts, and investment growth.

Compound interest formula

The standard formula is A = P(1 + r/n)^(nt). A is the final amount, P is principal, r is annual interest rate as a decimal, n is compounding periods per year, and t is time in years.

If you invest 10,000 at 8 percent compounded annually for 10 years, the formula is 10,000 x (1 + 0.08)^10. The final amount is about 21,589.

• P: starting principal.
• r: annual rate as a decimal.
• n: number of compounding periods per year.
• t: years invested.

Why compounding frequency matters

Monthly compounding earns interest more often than annual compounding. Daily compounding earns slightly more again, although the difference is usually small at normal rates.

When comparing products, check the effective annual yield, not only the stated annual rate.

Adding monthly deposits

Real savings plans often include monthly contributions. In that case, the final value includes growth from the starting principal plus growth from every added deposit.

A calculator is useful because each monthly deposit has a different amount of time to compound.

Step-by-step summary

1. Write the starting principal.
2. Convert annual interest rate to a decimal.
3. Choose compounding frequency.
4. Enter the number of years.
5. Apply A = P(1 + r/n)^(nt).
6. Subtract principal from final amount to find interest earned.

Frequently asked questions