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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.

EditPart One of Three:
Preparation

  1. Calculate Compound Interest Step 1.jpg
    1
    Find your financial documents that state the compounded interest rate for a certain investment or loan.
  2. Calculate Compound Interest Step 2 Version 2.jpg
    2
    Find 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.
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    3
    Take 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 Two of Three:
Examine the Formula

  1. Calculate Compound Interest Step 4.jpg
    1
    View 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)."
  2. Calculate Compound Interest Step 5 Version 2.jpg
    2
    Figure 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 Three of Three:
Use the Formula

  1. Calculate Compound Interest Step 6 Version 2.jpg
    1
    Plug 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.
  2. Calculate Compound Interest Step 7 Version 2.jpg
    2
    Simplify 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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    3
    Simplify 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.
  4. Calculate Compound Interest Step 9.jpg
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    Solve 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.
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    5
    For example, FV= 5,000 (1.071) or FV= $5,355. You will earn $355 in interest.

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.
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EditThings You'll Need

  • Pen
  • Paper
  • Calculator
  • Interest rate
  • Compound rate
  • Principal investment/loan
  • Duration of investment/loan

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