How Compound Interest Works: Formula and Calculation Guide

Retained from the earlier FinanceMath website. This historical guide has not yet completed the rebuild’s editorial review. Tax rates, eligibility rules and dated claims must be checked against current official sources. For tested calculation methods, use the current calculators.

How Compound Interest Works: Formula and Calculation Guide

Understand the mathematical power of compound interest and how small monthly contributions build long-term wealth.

The Power of Compounding

Compound interest is interest calculated on the initial principal as well as accumulated interest from previous periods. Over long horizons, it accelerates wealth growth exponentially.

The Mathematical Formula

The standard compounding formula is A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is frequency per year, and t is time in years.