Compound Interest Formula Explained with Examples (2026)
Albert Einstein reportedly called compound interest the "eighth wonder of the world." Whether or not that story is true, compound interest is the most powerful concept in personal finance. It is the reason long-term investors grow wealthy and why debt taken at high rates is so dangerous. This guide explains the formula, shows you exactly how to calculate it, and reveals how to use it to your advantage.
What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (which only earns on the original principal), compound interest earns interest on interest " causing your money to grow exponentially.
The Compound Interest Formula
P = Principal (initial investment or loan)
r = Annual interest rate (as decimal, e.g. 10% = 0.10)
n = Number of times interest compounds per year
t = Time in years
A = Final Amount
CI = A P = Interest earned
Step-by-Step Example
You invest 1,00,000 at 10% annual interest, compounded monthly, for 5 years:
r = 0.10 | n = 12 | t = 5
A = 1,00,000 — (1 + 0.10/12)^(12—5)
A = 1,00,000 — (1.00833)^60
A = 1,00,000 — 1.6453 = 1,64,533
CI = 1,64,533 1,00,000 = 64,533 earned!
Compounding Frequency Comparison
Same investment: 1,00,000 at 10% for 5 years. Effect of compounding frequency:
| Frequency | n | Final Amount | Interest Earned |
|---|---|---|---|
| Annual | 1 | 1,61,051 | 61,051 |
| Quarterly | 4 | 1,63,862 | 63,862 |
| Monthly | 12 | 1,64,533 | 64,533 |
| Daily | 365 | 1,64,861 | 64,861 |
Simple Interest vs Compound Interest
On the same 1,00,000 at 10% for 5 years:
Simple Interest: SI = 1,00,000 — 10 — 5 / 100 = 50,000
Compound Interest (annual): CI = 61,051
Compound wins by 11,051 " and this difference grows massively over longer periods!
The Rule of 72 " Quick Mental Math
Need to estimate how long it takes to double your money? Use the Rule of 72:
Example: At 8% → 72 8 = 9 years to double
Use Our Free Compound Interest Calculator
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Enter principal, rate, time, and compounding frequency to see your exact returns with a year-by-year growth chart.
Open Compound Interest Calculator →Also explore our SIP & Investment Calculator to plan your mutual fund investments with compound growth.
FAQs
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus any interest already earned, causing exponential growth.
Does FD use compound interest?
Yes, bank Fixed Deposits in India use quarterly compounding by default. Some banks offer monthly compounding which gives slightly higher returns.