How to Calculate Compound Interest with Examples?.

To calculate compound interest, use the formula: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the number of years the money is invested or borrowed.

Step-by-step

1. Identify the principal amount (P).
2. Determine the annual interest rate (r) as a decimal.
3. Decide how often the interest is compounded (n).
4. Choose the number of years the money is invested (t).
5. Substitute these values into the formula.
6. Calculate the total amount (A).
7. Subtract the principal (P) from the total amount to find the compound interest earned.

Key Facts

• Compound interest can significantly increase savings over time.
• Interest can be compounded annually, semi-annually, quarterly, or monthly.
• The effect of compounding increases as the frequency of compounding increases.
• Starting early with investments can lead to greater compound growth.

Examples or Use Cases

• If you invest $1,000 at an interest rate of 5% compounded annually for 5 years, the calculation yields approximately $1,276.28.
• For a $500 investment at 3% compounded monthly for 10 years, the result is approximately $671.58.

Common Mistakes / FAQs

• Ignoring compounding frequency: Always specify how often interest is compounded.