How to calculate compound interest
Compound interest adds each period's interest to the balance so later interest is earned on it too. The balance is the starting amount multiplied by one plus the periodic rate, raised to the number of periods.
Skip the maths and use the compound interest calculator
The formula
A = P × (1 + r ÷ n)^(n × t), where P is the starting amount, r the annual rate, n the compounds per year and t the years.
Step by step
- Divide the annual rate by the number of times interest is added each year.
- Multiply the years by the same number to get the total periods.
- Raise one plus the periodic rate to that number of periods.
- Multiply by the starting amount.
Worked example
5,000 at 5% a year, compounded monthly for 10 years
- Periodic rate = 0.05 ÷ 12
- Periods = 12 × 10 = 120
- A = 5,000 × (1 + 0.05 ÷ 12)^120
The balance is about 8,235.05, so the interest earned is about 3,235.05.