Compound interest refers to the interest that an account accumulates over more than one compounding period. The interest that gets added to the account after the first compounding period begins to accrue more interest itself, increasing the interest paid over future compounding periods. To calculate compounding interest, you need to know the periodic interest rate, the amount of money in the account and the number of periods the money remains in the account.
- Skill level:
- Moderately Easy
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Things you need
Convert the periodic rate into a decimal from a percentage by multiplying it by 1/100. For example, if the periodic rate equals 1.05 per cent, you would multiply 1.05 by 1/100 to get 0.0105.
Add 1 to the periodic rate expressed as a decimal. In this example, you would add 1 to 0.0105 to get 1.0105.
Determine the number of periods the money will accrue interest. For example, if the periodic rate equals the monthly rate, and you leave the money in the account for three years, you would be leaving the money in the account for 36 periods.
Multiply the result from Step 2 by itself C number of times, where C is the number of compounding periods the money will be left in the account from Step 3. In this example, you would multiply 1.0105 by itself 36 times to get 1.456489784.
Subtract 1 from the result from Step 4 to calculate the overall percentage increase expressed as a decimal. In this example, you would subtract 1 from 1.456489784 to get 0.456489784.
Multiply the overall percentage increase by the amount originally invested in the account to find the total interest. Finishing this example, if the account started with £7,150, you would multiply 0.456489784 by £7,150 to find that £3,263.9 of interest would have accrued.
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