Guide to the Compound Interest Formula | GoCardless

How to calculate compound interest SkiptocontentOpensitenavigationsidebarWhyGoCardless?ForusecaseSubscriptionpaymentsRecurringpaymentsbuiltforsubscriptionsInvoicepaymentsCollectandreconcileinvoicepaymentsautomaticallyOurcustomersCustomerstoriesHearfromourcustomersCustomersuccessOurcustomerfirstapproachCustomerHubTrainingresources,documentation,andmoreForsmallbusinessOverviewImproveyourcashflowKeeptrackofpaymentsReducecostsReducefailedpaymentsIncreaseconversionsForenterpriseOverviewReducechurnReduceinternationalbarriersReduceoperationalcostsReducetimetogetpaidReduceconversionriskProductFeaturesRecurringpaymentsIdealforsubscriptionsandinvoicesInstantBankPayIdealforone-offpaymentsInternationalpaymentsCollectfrom30+countriesSuccess+ReducepaymentfailuresIntegrationsAPIintegrationsBuildacustomintegrationPartnerintegrationsConnectto200+partnerappsPricingLearnHelp&SupportCustomerHubTrainingresources,documentation,andmoreFAQCommonquestionsansweredAPIdocumentationGuidesforintegratorsNews&resourcesLatestarticlesandresearchGuidetoopenbankingGuidetoDirectDebitEngineering@GCMasteringPaymentsseriesLoginSignupBreadcrumbResourcesFinanceGuidetothecompoundinterestformulaTableofcontentsWhatiscompoundinterest?HowtocalculatecompoundinterestCompoundinterestequationTheimportanceofcompoundingfrequencyThebottomlineWecanhelpIfyou’relookingforfinancialproductswiththemostattractiveinterestrates,thecompoundinterestformulaisanimportantequationtoknow.Keepreadingtolearnmoreaboutthisformulaandhowit’sapplied.Whatiscompoundinterest?Compoundinterestisadditionalinterestearnedonyouraccount’sexistinginterestrates–interestoninterest.Bycontrast,simpleinterestreferstointerestonprincipalfundsdepositedintoyouraccount.Inaddingthisextralayerofinterest,compoundingallowsforfastergrowththanyouwouldseewithsimpleinterestalone.Younotonlyearninterestonyourprincipal,butalsoontheprincipal’searnedinterest.HowtocalculatecompoundinterestTocalculatetherateatwhichyourcompoundinterestwillaccrue,youneedtofactorinseveralcomponents.Thisincludesthefrequencyofcompounding,theinterestrate,andtheinitialamountofmoneydeposited(principal).Themorecompoundingperiodsyouhave,thehigheryourcompoundinterestwillbe.Thecompoundinterestformulaworksbymultiplyingyourinitialprincipalbyoneplustheannualinterestrate,raisedtothenumberofcompoundperiods.You’llthenneedtosubtracttheinitialloanamountfromthisvalue.CompoundinterestequationFiguringouthowtocalculatecompoundinterestiseasierwhenyoucanseeitlaidoutinanequation.Here’sthecompoundinterestformulaforquickcalculations:A=p(1+r/n)^(nt)A=finalamountP=principalbalanceR=interestrate(asdecimal)N=numberoftimesinterestwillbeappliedpertimeperiodT=numberoftimeperiodselapsedAsanexample,imaginethatyouhavedepositedaprincipalamountof£10,000withanannualinterestrateof5%,whichwillbecompoundedmonthlyoveraperiodoffiveyears.Youcanthenplugthisintothecompoundinterestequationtocalculatetheinterestyouwouldearn:£10,000(1+0.05/12)^(12x5)=£12,833.59You’dearn£2,833.59ontopofyourinitialinvestmentamountthroughcompoundinterest.Ifyouweretotrackthecompoundinterestformulainagraphicform,you’dseethesignificantdifferencebetweencompoundandsimpleinterest.Whilesimpleinterestwouldshowthesameinterestamountaccumulatingovertime,compoundintereststartstogrowexponentially.Itcanbetrickytoworkoutthecompoundinterestequationbyhand,butfortunatelytherearenumerousonlinecalculatorstotakecareofthemathsideforyou.AnotheroptionistouseExceltocalculatecompoundinterest.TheimportanceofcompoundingfrequencyThenumberofcompoundingperiodsmakesabigdifferenceinyourresultingsum.Interestcanbecompoundedaccordingtoanyscheduleoffrequency,whetherit’sdaily,weekly,monthly,orannually.Forthetypicalsavingsaccount,adailyscheduleisusuallyfollowed,whilebusinessloansandcreditcardaccountsoftenuseamonthlyschedule. Overthelongterm,compoundinterestcangiveyourinvestmentreturnsasignificantboost.Lookforamorefrequentcompoundingscheduletomaximizereturns.Ontheotherhand,ifyou’reborrowingmoney,you’dwanttochooseafinancialproductwithlessfrequentcompoundingschedules.Continuouslycompoundinginterest,asthenamesuggests,addsinteresttoyourprincipalonanongoingbasis.Inreality,interestthat’scompoundedcontinuouslydoesn’tadduptomuchmorethanadailyfrequency.However,itcanbeworthwhileifyouwanttoearnmoneyinasingleday.ThebottomlineCompoundinterestismostbeneficialforinvestors,whocanreceivehigherreturnsonbankaccountsandbonds.Whetheryourinterestiscompoundedcontinuouslyorannually,knowingtheinsandoutsofthecompoundinterestformulacanhelpyougaingreaterunderstandingofhowyourprincipalgrows.WecanhelpGoCardlesshelpsyouautomatepaymentcollection,cuttingdownontheamountofadminyourteamneedstodealwithwhenchasinginvoices.FindouthowGoCardlesscanhelpyouwithadhocpaymentsorrecurringpayments. GoCardlessisusedbyover60,000businessesaroundtheworld.Learnmoreabouthowyoucanimprovepaymentprocessingatyourbusinesstoday.LearnmoreSignUpRelatedtopicsFinanceRecommendedforyou1minread—GoCardlessAnnouncingournewGreenhouseGasCalculatorWe'velaunchedanew,freeresourcetohelpbusinessescalculatetheiremissions1minread—GoCardlessAnnouncingournewGreenhouseGasCalculator2minread—PaymentsHowDoesBankDataValidationWork?2minread—AccountantsPCIComplianceSelf-AssessmentQuestionnaire2minread—PaymentsHowtopreventcredentialstuffingattacks2minread—AccountantsMerchantCategoryCodesExplained2minread—FinanceWhatIsInterchangePlusPricing?Interestedinautomatingthewayyougetpaid?GoCardlesscanhelpContactsales