How to Calculate Compound Interest

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.

 Steps

Part One: Preparation

    1
    Find your financial documents that state the compounded interest rate for a certain investment or loan.
    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.
    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.

Part Two: Examine the Formula

    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
    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.

Part Three: Use the Formula

    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
    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).
    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 1.068.
    4
    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.
    5
    For example, FV= 5,000 (1.068) or FV= $5,340. You will earn $340 in interest.

Tips

    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.

Things You'll Need

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