How to Calculate Compound Interest

This is a brief introduction on how to calculate your compound interest.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Possibly a calculator
• Principal amount invested
• Rate of return
• Number of years (you decide this)

1. FV = P(1 + r)n => this yields your formula for future value
   FV= Future Value
   P= Your Principal investment
   r= Your rate of return expressed as a decimal (5% expressed as 0.05)
   n= number of years you want to know(calculate as a power of)

2. Get your calculator (some calculators already have this formula; just plug in numbers)
   If not, you must first perform parenthesses calculation first (1+r)
   Ex: (1+0.05)= 1.05
   
   So, your formula now looks like this FV=P(1.05)n

3. Next, put in your Principal amount. Let's say $1000 is your principal amount.
   Your formula now looks like this FV=1000(1.05)n We are almost done!
   Now put in the number of years. Let's say 10 years.
   So, FV=1000(1.05)10 and that is 1.05 to the tenth power.

4. Your calculator on your desktop will handle this quite well. Switch over to scientific mode. Put in 1.05 then press the x^y key and then enter 10. This will give you 1.62889462675(according to my accounting calculator) round to 1.63.

5. Now, FV=1000(1.63) and 1000 multiplied by 1.63= 1630.
   So, in 10 years you will have gained $630 in interest compounded.

Tips & Warnings

• Great tool for beginner investors that want to get quick answers without having to look up the formula all the time.
• May be too much math for some.

Resources

• Money Chimp

[leduncan]

on 6/29/2009 This is a very good write up and explanation of calculating compound interest! Thanks!

[mattcastle12]

on 4/4/2008 Nice post. Perhaps those fearful of investing will see this article and realize how powerful a concept compounding interest can be for their retirement accounts.

[SharieHeading]

on 3/5/2008 I have a question off subject...hope you can help with an answer..my employer has been holding a reserve amount of my income..for over a year now how much interest can I charge someone for holding my money ( what would they recieve on interest) can I charge that interest compounded daily or monthly? What amount of interest would be the going rate or fair and equitable to charge do you think?