How to Calculate Compound Interest

The information you need

To calculate compound interest you need four main details: the starting balance, the interest rate, how often interest is compounded and how long the money will grow. If you are adding money regularly, you also need the contribution amount and frequency.

Make sure the rate and time period use compatible units. A 5% annual rate is 0.05 in the standard formula.

Want to try the idea yourself? Use the Compound Interest Calculator.

The compound interest formula

The standard formula is A = P(1 + r/n)^(nt). A is the final balance, P is the principal or starting amount, r is the annual rate as a decimal, n is the number of times interest compounds each year and t is the number of years.

The compound interest earned is the final balance minus the starting principal, although regular deposits need to be accounted for separately.

If you want to explore this topic further, see What Is Compound Interest and How Does It Work?.

Worked example: £5,000 at 4%

Suppose £5,000 earns 4% a year, compounded annually, for five years. The calculation is 5,000 × (1.04)^5, giving a balance of about £6,083.26. The growth above the original £5,000 is about £1,083.26.

Notice that five years of 4% compound growth is not simply £200 of interest every year. Each year, the interest is calculated on a slightly larger balance.

What changes with monthly compounding?

For monthly compounding, n becomes 12. The annual rate is effectively divided across 12 compounding periods, and each month the new interest becomes part of the balance for the next month.

The difference between annual and monthly compounding may be modest over a short period, but it becomes more noticeable with larger balances, higher rates or longer times.

The easiest way to compare scenarios

Manual formulas are useful for understanding the maths, but a calculator is much quicker when you want to compare rates, time periods or contributions. Try several realistic scenarios rather than relying on a single projection.

Use the Compound Interest Calculator to see the estimated final balance and how changing one input affects long-term growth.