The formula for annual compound interest is A = P (1 + r/n) ^ nt:
Where:
A = the future value of the investment/loan, including interest;
P = the principal investment amount (the initial deposit or loan amount);
r = the annual interest rate (decimal);
n = the number of times that interest is compounded per year;
t = the number of years the money is invested or borrowed for.
Example of Compound Interest Formula:
If an amount of $1,000 is deposited into a savings account at an annual interest rate of 5%, compounded monthly, the value of the investment after 10 years will be calculated as follows:
P = 1000. r = 5/100 = 0.05 (decimal). n = 12. t = 10.
If we put all these figures into the formula, we will get:
A = 1000 (1 + 0.05 / 12) ^ 12(10) = 1647.01 or 1000 * 1.64700949835 = 1647.01.
So, the investment balance after 10 years will be $1,647.01.
The great benefit of the compound interest will become clear when you will find out that your investment balance in the above example without compound interest would be $1,500 ($50 per year for 10 years, plus the original $1000) by the end of the term. So, thanks to the wonder of the compound interest formula, you will gain an additional $147.01.
So, go ahead and use our easy and free Compound Interest Calculator and calculate your compound interest right now!