Enter your principal amount, interest rate, time period, and compounding frequency into the calculator to determine your compound interest.

Compound Interest Calculation Formula

The following formula is used to calculate the compound interest. 

Compound Interest = Principal * (1 + (Rate / Frequency))^(Frequency * Time)

Variables:

  • Compound Interest is the interest calculated on the initial principal, which also includes all the accumulated interest from previous periods on a deposit or loan ($)
  • Principal is the initial sum of money ($)
  • Rate is the annual interest rate (%)
  • Frequency is the number of times that interest is compounded per year
  • Time is the time the money is invested or borrowed for, in years

To calculate the compound interest, multiply the principal amount by the accumulated interest factor based on the rate, frequency, and time period.

What is Compound Interest Calculation?

Compound interest calculation refers to the process of determining the amount of interest that accrues on an initial principal amount over time, taking into account the interest that is added to the principal at regular intervals. This method of interest calculation results in interest being earned on interest, which can significantly increase the amount of interest earned over time. Understanding compound interest is essential for making informed financial decisions regarding savings, investments, and loans.

How to Calculate Compound Interest?

The following steps outline how to calculate the compound interest using the given formula.

  1. First, determine your principal amount.
  2. Next, determine the annual interest rate and the compounding frequency.
  3. Then, decide the time period for which the money will be invested or borrowed.
  4. Use the formula from above: Compound Interest = Principal * (1 + (Rate / Frequency))^(Frequency * Time).
  5. Finally, calculate the compound interest by plugging in the values.
  6. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem:

Use the following variables as an example problem to test your knowledge.

Principal Amount = $10,000

Annual Interest Rate = 5%

Time Period = 10 Years

Compounding Frequency = Monthly

FAQ

1. What is compound interest?

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

2. How is compound interest different from simple interest?

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal amount and also on the interest that has been added to the principal over time.

3. How often is interest compounded?

Interest can be compounded at different frequencies, such as monthly, quarterly, semi-annually, or annually. The more frequently interest is compounded, the greater the amount of interest accrued.

4. Can this calculator be used for different compounding frequencies?

Yes, you can adjust the compounding frequency field to match the desired frequency to calculate the compound interest accordingly.

5. Is the calculator accurate?

The calculator provides an estimate of your compound interest based on the inputs provided. For exact figures, it’s best to consult with a financial advisor or use more advanced financial software.