Finance · 2 min read
How to calculate compound interest
Compound interest earns interest on your earlier interest. The formula needs the starting amount, the rate, how often it compounds and the time.
Last updated November 5, 2026
The formula
final amount = P × (1 + r ÷ n)^(n × t)
- P
- the starting amount (the principal)
- r
- the annual rate as a decimal, 0.05 for 5%
- n
- how many times a year interest compounds, 1 for yearly and 12 for monthly
- t
- the time in years
Interest earned is the final amount minus P.
Worked example: yearly compounding
10,000 at 5% for 10 years, compounded yearly
Result: 10,000 × 1.05^10 ≈ 16,288.95 (interest ≈ 6,288.95)
Worked example: monthly compounding
The same deposit, compounded monthly
Result: 10,000 × (1 + 0.05 ÷ 12)^120 ≈ 16,470.09
More frequent compounding gives a little more, about 181 extra over ten years in this case.
Compared with simple interest
Simple interest is paid only on the principal.
10,000 at 5% for 10 years
| Method | Calculation | Final amount |
|---|---|---|
| Simple interest | 10,000 + 10,000 × 0.05 × 10 | 15,000.00 |
| Compounded yearly | 10,000 × 1.05^10 | 16,288.95 |
Compounding adds about 1,289 on top, and the gap grows the longer the money stays invested.
The rule of 72
A quick estimate of the years to double your money is 72 ÷ the annual rate in percent. At 5% that is 72 ÷ 5 = 14.4 years. The exact figure is about 14.2 years, so the shortcut is close.
What to remember
Important
- The rate and the compounding period must match: use a monthly rate for monthly periods, or use the annual rate with n = 12 as in the formula.
- Regular deposits add to the result. Use a savings or investment calculator for those.
- Real returns vary. The formula assumes a fixed rate, and it ignores fees, taxes and inflation.