How do you calculate compound interest?

Compound interest is interest calculated on both the principal amount and any interest earned in previous periods. Essentially, it means that interest is earned on interest, resulting in exponential growth of your investment.

To calculate compound interest, you will need to know the principal amount, the interest rate, the compounding frequency, and the time period.

Formula for Compound Interest Calculation

The formula for calculating compound interest is:

A = P (1 + r/n) ^ nt

• A is the future value of the investment
• P is the principal amount of the investment
• r is the interest rate
• n is the number of times interest is compounded per year
• t is the time period in years

Example of Compound Interest Calculation

Suppose you invested $1,000 at a 5% annual interest rate that is compounded monthly. After 5 years, your investment would be worth:

A = $1,000 (1 + 0.05/12) ^ (12 * 5)

A = $1,283.35

So, your investment would be worth $1,283.35 after 5 years.

Compound interest is interest that is calculated on both the principal amount and the accumulated interest of previous periods. This means that the interest you earn in one period is added to the principal amount, and then interest is calculated on the new, larger principal amount in the next period. This can lead to a significant increase in the amount of interest earned over time, especially if the interest rate is high and the interest is compounded frequently.

To calculate compound interest, you can use the following formula:

$A = P(1 + r/n)^nt$

where:

• $A$ is the future value of the investment
• $P$ is the principal amount
• $r$ is the annual interest rate as a decimal
• $n$ is the number of times interest is compounded per year
• $t$ is the number of years

For example, let's say you invest $1000 at an annual interest rate of 5%, compounded monthly. After 1 year, your investment would be worth $1051.27. This is because you would earn $50 in interest in the first year, and then you would earn interest on the $50 interest in the second year.

The more often interest is compounded, the more money you will earn over time. For example, if you were to invest $1000 at an annual interest rate of 5%, compounded daily, your investment would be worth $1051.61 after 1 year. This is because you would earn interest on the $50 interest 365 times in the first year.

Compound interest can be a powerful tool for building wealth over time. By investing your money and letting it compound, you can earn a significant return on your investment.