Easy Way to Calculate Compound Interest

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Whenever you open an account that earns interest, it will most likely have compounding interest. Interest that compounds means that you earn interest on your principal and any other interest that you have previously earned. Compound interest builds money faster than simple interest. For example, if you have $100 and the first month you earn $5 in interest, then the next month simple interest would be calculated on $100, while compound interest is calculated using $105.

  • Find the beginning balance of the account, interest earned per compounding period, the number of times the interest compounds annually and the number years it compounds. For example, assume you put $1,000 in a bank account that earns 2 percent interest per month. The interest compounds monthly and you plan on keeping the money in the account for four years.

  • Add one to the interest rate per compounding period. In the example, one plus 0.02 equals 1.02. This represents the principal plus interest.

  • Multiply the number of times the account compounds a year by the number of years you plan on using the account. In the example, 12 times 4 equals 48 times.

  • Raise the principal plus the interest from Step 2 to the power of the number of times you compound. Raising to the power is another term for an exponent. Exponents multiply a base number by the exponent. For example, if you have four raised to the third power, it means four times four times four. A calculator for exponents is available in the resources. In the example, 1.02 raised to the power of 48 equals 2.587070385. This is your interest factor.

  • Multiply your original balance by the interest factor to find the account's worth at the end of the period. In the example, $1,000 times 2.587070385 equals $2,587.08. This is how much money your $1,000 will be worth after four years.

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