How to Calculate Compound Interest

Compound interest means interest is added to the balance, then future interest is calculated on that larger balance. For a quick estimate, enter your starting amount, rate, term, and deposit pattern in the compound interest calculator.

The short version

The standard compound interest formula is A = P(1 + r/n)^(nt).

• A is the future balance.
• P is the starting amount.
• r is the annual interest rate as a decimal.
• n is the number of compounding periods per year.
• t is the number of years.

If you add regular deposits, the calculation needs to apply each deposit at the right time instead of using only the simple lump-sum formula.

Try it with your own numbers

Use the compound interest calculator when you want to model deposits, withdrawals, different compounding frequencies, monthly terms, or annual contribution increases. Use the daily compound interest calculator for day-by-day scenarios.

How the calculation works

Start by converting the rate into a decimal. A 5% annual rate becomes 0.05. Then divide by the compounding frequency. Monthly compounding uses 12 periods per year, so each period uses 0.05 / 12.

For a simple lump sum:

• Add 1 to the periodic rate.
• Raise it to the total number of periods.
• Multiply by the starting balance.
• Subtract the starting balance if you only want interest earned.

Regular deposits make the result more realistic, but also more sensitive to timing. A deposit made at the beginning of a month earns slightly more than one made at the end.

A worked example

Suppose you start with 5,000, earn 5% per year, compound monthly, and leave the money for 5 years.

The calculation is:

• Periodic rate: 0.05 / 12 = 0.0041667
• Number of periods: 12 x 5 = 60
• Future value: 5,000 x (1.0041667)^60
• Estimated balance: about 6,416

That means the interest earned is about 1,416 before tax, fees, inflation, or rate changes.

Watch-outs

• Using 5 instead of 0.05 in the formula.
• Treating APR and APY as the same thing.
• Ignoring fees, tax, and inflation.
• Assuming a rate stays fixed for the whole term.
• Comparing results with different deposit timing.

How to read the result

Use a compound interest estimate to compare savings plans, investment assumptions, or long-term contribution habits. It is most useful when you change one input at a time: rate, term, starting amount, or deposit amount.

For investing, remember that steady growth is an assumption, not a promise. Markets can fall, returns vary, and tax treatment depends on your situation.

Tools mentioned in this article

• Daily compound interest calculator
• Savings goal calculator
• Investment return calculator
• CAGR calculator
• Finance calculators

Reader questions

Is monthly compounding better than yearly compounding?

Monthly compounding usually produces a slightly higher balance than yearly compounding at the same nominal rate because interest is added more often.

Does compound interest work with regular deposits?

Yes, but each deposit has its own time in the account. Earlier deposits have more time to earn interest.

What is the difference between APR and APY?

APR is usually the stated annual rate before compounding. APY reflects the effect of compounding across the year.

Why does a small rate change matter so much?

The rate is applied repeatedly over time. Longer terms magnify the effect of even small differences.