How to Calculate Compound Interest
Three Parts:PreparationExamine the FormulaUse the Formula
Compound interest is an interest rate for a loan, investment or other financial transaction that is calculated more than once per year. Compounding interest more often can result in a higher interest payment, so you should figure out what the future value of the transaction is, based on the effect of compound interest on your principal amount. You can learn how to calculate compound interest by using the formula in the article below.
EditSteps
EditPart 1 of 3: Preparation
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1Find your financial documents that state the compounded interest rate for a certain investment or loan.Ad -
2Find the necessary numbers. You will need to know the principle amount of money invested, the interest rate, the frequency of compounding the interest and then years the money will be compounded to find the future value of a compound interest rate. -
3Take out a pen, paper and calculator. These are helpful when plugging numbers into a formula.- Make sure you are using a calculator that can calculate exponents.
EditPart 2 of 3: Examine the Formula
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1View the formula that you will use before you plug in numbers. Future Value/Amount = Principal Investment x (1 + interest rate/frequency of compounding every year)^(years x frequency of compounding every year)- The years times number of times compounded is an exponent to the (1 + interest rate/frequency of compounding every year).
- You can also write "FV=P (1+i/c)^(n x c)."
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2Figure out the number of times the interest rate is compounded annually. If compounded daily, it is 365. If compounded weekly it is 52 and if compounded monthly it is 12.
EditPart 3 of 3: Use the Formula
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1Plug in the numbers you are using into the formula.- For example, if you want to invest $5,000 with an interest rate of 3.45%, compounded monthly for 2 years, you would write FV=5,000(1+.0345/12)^(12x2).
- Turn your interest rate into a decimal before plugging it into the formula. Divide by 100 to get the decimal.
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2Simplify the problem by solving for the parts of the equation in parenthesis.- For example, FV=5,000(1+.0345/12)^(12x2) can be simplified to FV=5,000(1.002875)^(24).
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3Simplify further by solving for the exponent in the latter part of the problem before multiplying by the principal amount.- For example, (1.002875) to the 24th power is 1.071.
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4Solve the equation by multiplying this number by the principal amount. The FV, or Future Value, is the amount of money you will have after 2 years. -
5For example, FV= 5,000 (1.071) or FV= $5,355. You will earn $355 in interest.Ad
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EditTips
- You can use an online compound interest calculator to do this math problem quickly. They are available on sites like rapidtables.com/calc/math/Exponent_Calculator.htm and thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php.
EditThings You'll Need
- Pen
- Paper
- Calculator
- Interest rate
- Compound rate
- Principal investment/loan
- Duration of investment/loan
Article Info
Categories: Finance and Business
In other languages:
Italiano: Come Calcolare gli Interessi Composti, Português: Como Calcular Juros Compostos, Español: Cómo calcular el interés compuesto, Deutsch: Den Zinseszins berechnen, Français: Comment calculer un intérêt composé, Русский: вычислить сложный процент, 中文: 计算复利
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