The Formula for Compound Interest Rate

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?

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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.