Compound
interest is the concept of earning higher interest rate. If you have
an account that earns compound interest this means that the bank pays
you interest on your principal sum of money, plus on the interest
your account has already earned. This means that your interest earns
you even more money as interest.

A
compound interest account can gain you a lot more money than may
expect when calculating with a simple interest rate. But to find out
exactly how much more, you need to use a compound interest formula.

**What is a Compound Interest Formula**

A
compound interest formula is the mathematical calculation of how your
interest earnings would add to to give you the final sum total. It is
a very important tool to track your current finances and plan your
future investments. If you are contemplating the steps to a future
financial venture such as getting a house or a car, the formula for

**compound interest rate**will help you understand exactly how much you stand to gain through your bank account and you can then estimate how much of loan payment you can afford.**How do I calculate the compound interest formula?**

The
formula for calculating compound interest is:

A
= P (1 + r/n) (nt)

where

A
= The money (including interest) you will accumulate after ‘n’
number of years. This is also the answer to the compound interest formula and calculates the future value your investment or loan.

P
= The principal amount of money you invested initially.

r
= The annual rate of interest. This information is to be entered as a
decimal into the formula.

n
= The number of times interest is compounded per year, or the number
of times the interest is paid to your account.

t
= The number of years the money has been invested for.

If
you have the correct information for all the values in the formula,
you will get the correct amount of money you will earn with this
investment.

If
you want to calculate only the compound interest you earn and not the
entire amount (principal plus interest), you need to tweak the
formula to subtract the initial principal amount you invested. Then
the formula you are looking for becomes as below:

Total
compounded interest = P (1 + r/n) (nt) – P

All
the variables in this formula remains the same as in the original
formula. And you get the sum of money you will have earned in the
future.

**The Benefits of Using the Compound Interest Formula**

Besides
the obvious benefit of learning how much interest you earn in future,
compound interest calculation formula helps you make an investment in
the first place.

For
example, if you want to purchase a house sometime in the future, the
compound interest rate formula will show you exactly how much money
you need to invest, for how long, and at what interest rate in order
to buy your dream house.

- The formula for
*compound interest shows*that your earnings grow exponentially over time. The longer duration you invest your money for, the greater your overall earnings will be. You can use this compound interest formula to judge what your period of investment should be to earn a desired sum of money. - Compound interest formula shows you exactly how large of an initial payment you need to make. A higher ‘P’ or initial investment will also lead to a greater income.
- The same exponential rule applies to the interest rate. As with all savings, the higher the interest rate, the more money you earn as interest.

Thus
we see that by using the formula, you never have to step blindly into
an investment.

**The ‘Quarterly’ Compound Interest Formula**

We
often have the need to calculate the compound interest we get in
quarterly measure, as most banks pay interest to your account on a
quarterly basis. We can tweak the compound interest formula to our
benefit in this case.

The
compound interest formula is made up of different pieces, each
representing a different component. We have the component ‘n’
which is the number of times interest is compounded within a
financial the year. So if your interest is compounded quarterly, then
the value of ‘n’ in the compound interest formula will be 4.
Thus, there is no need to formulate a different formula for quarterly
compound interest calculation.

By
changing the value of ‘n’ you can use the compound interest
formula to determine quarterly, bi-annually, monthly and yearly
compound interest. Thus, this compound interest formula can help you
calculate interest on any type of compound interest account you plan
to open.

**Compound Interest Formula is a Friend**

Most
mathematical equations looks intimidating, the compound interest
formula is no exception. But you have all the correct details it is
not difficult at all to use this formula to your advantage.

Using
this formula, you will also be to compare the amount you would earn
in a standard account to that in a compound interest account. The
compound interest rate formula will let you see how the difference
between how much the two accounts will earn for you.

Compound
interest formula is a friend which is here to help you score up your
earnings.