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What Is Compound Interest?
Compound interest is the interest earned on both the principal of an investment (the initial amount invested) and the accumulated interest from previous periods. For example, here is how $1,000 will grow over 2 years when invested in a savings account earning a 3% annual interest rate and compounding quarterly:
Year 1, 1st quarter: $1,000.00 x (1 + 0.03 / 4) = $1,007.50
Year 1, 2nd quarter: $1,007.50 x (1 + 0.03 / 4) = $1,015.06
Year 1, 3rd quarter: $1,015.06 x (1 + 0.03 / 4) = $1,022.67
Year 1, 4th quarter: $1,022.67 x (1 + 0.03 / 4) = $1,030.34
Year 2, 1st quarter: $1,030.34 x (1 + 0.03 / 4) = $1,038.07
Year 2, 2nd quarter: $1,038.07 x (1 + 0.03 / 4) = $1,045.86
Year 2, 3rd quarter: $1,045.86 x (1 + 0.03 / 4) = $1,053.70
Year 2, 4th quarter: $1,053.70 x (1 + 0.03 / 4) = $1,061.60
How to Calculate Compound Interest?
Generalizing the above example leads to the formula:
where F is the final amount, I is the initial amount, R is the yearly interest rate, C is the number of times compounding occurs in a year, and T is the time to grow the investment in years.
Tips and Tricks
Time to grow can be a decimal value. For example, enter 1.25 (years) for 15 months.