How to Calculate Compound Interest (With Examples)
Compound interest is the engine behind long-term wealth. Here's the formula, intuition, and worked examples.
Compound interest is interest calculated on the initial principal and on the accumulated interest from previous periods. Unlike simple interest, it grows exponentially over time, which is why Einstein supposedly called it the eighth wonder of the world.
The formula
A = P (1 + r/n)^(nt) — where P is the principal, r is the annual rate, n is the number of compounding periods per year, and t is time in years.
If you invest $10,000 at 7% compounded monthly for 20 years, you end up with about $40,387 — over 4× your initial deposit, without adding a single dollar.
Why compounding frequency matters
The more often interest compounds, the faster your money grows. Daily compounding beats monthly, and monthly beats annual — but the differences shrink as the rate gets smaller.
