Solo Biz Soft Editorial Team Compound interest is interest on your interest. Your money earns a return, and next period that return earns a return too. Over long periods this snowball effect makes a big difference. Here is how to calculate it.
The formula
A = P × (1 + r ÷ n)^(n × t), where A is the final amount, P is the starting amount, r is the yearly rate as a decimal, n is the number of times interest is added each year and t is the number of years.
Step by step
- Write the rate as a decimal: 5% is 0.05.
- Divide the rate by the number of periods per year.
- Add 1, then raise the result to the power of periods per year times years.
- Multiply by the starting amount.
- Subtract the starting amount to see the interest earned.
Worked example
10,000 at 5% compounded yearly for 10 years: 10,000 × 1.05^10 = 16,288.95, so the interest is 6,288.95. With simple interest the same deposit would earn only 5,000.
Common mistakes
- Using the percentage instead of the decimal in the formula
- Forgetting to match the compounding period to the rate
- Ignoring fees, tax and inflation, which reduce the real return
Skip the maths: use our free compound interest calculator. For the non-compounding version, see the simple interest calculator.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is calculated only on the original amount. Compound interest is also calculated on the interest already earned.
Does compounding more often make a big difference?
A small one. Going from yearly to monthly adds a little, but the rate and the time matter far more.
What is the rule of 72?
A quick estimate: divide 72 by the yearly rate to guess how many years it takes to double your money.
More free tools: browse all our free calculators.
This article is general information and not financial advice.