Compound Interest Formula Explained
Learn the formula, see examples, and understand how to calculate investment growth.
The Standard Formula
A = P × (1 + r/n)nt
- A = Final amount
- P = Principal (starting amount)
- r = Annual interest rate (decimal)
- n = Number of times interest is compounded per year
- t = Number of years
Step-by-Step Example
Example: You invest $2,000 at an annual rate of 6%, compounded monthly, for 5 years.
P = $2,000, r = 0.06, n = 12, t = 5
A = 2,000 × (1 + 0.06/12)12×5 = $2,697.35
P = $2,000, r = 0.06, n = 12, t = 5
A = 2,000 × (1 + 0.06/12)12×5 = $2,697.35
Why the Formula Matters
- Shows how small differences in rate or time can make a big impact
- Helps compare different investment options
- Lets you plan for long-term financial goals