How to Calculate Compound Interest Savings

It is a rite of passage for many young children to bring their Christmas or birthday money to the bank and open up a savings account. Many of us still have that savings account that was opened up years ago.
However, when that savings account statement arrives, you may find yourself wondering how they calculated your interest and how you can predict the amount of interest you will receive in the next few years.

Instructions

1. Determine the interest rate of your savings account. This should have been given to you when you opened the account. If you have not opened a savings account yet, you can ask banks what their interest rates are for savings accounts. Do some comparative shopping. Go with the bank that offers the greatest rewards.

2. Write out the compound interest equation: M = P(1+i)^n [In this guide, the symbol '^' means 'to the power of']. "M" is the final amount you will receive after interest. "P" is the principal amount you put in the savings account. For our example I will use $200. "i" is the interest rate. For our example, I will use 1.5 percent in the equation. Write this as 1.5/100, which is 0.015.
   "n" is the number of years the principal amount will be in the savings account. For our example, I will use 5 years.

3. Write out the equation with the information filled in. For our example, this would be M = 200(1 + 0.015)^5.

4. Solve the equation inside of the parentheses first (1 + 0.015 = 1.015), so the equation is now M = 200(1.015)^5.

5. Solve the exponential part of the equation (1.015 ^ 5 = 1.08), so the equation is now M = 200(1.08).

6. Multiply the two remaining values (200 x 1.08 = 216), so the equation is now M = $216. To find how much interest you made, simply subtract the principle amount from the final amount, in this case $216 - $200 = $16. $16 of interest was made in a 5-year period.

Tips & Warnings

• This guide was written assuming you don't add any more to your savings account after the principal deposit.