How to Calculate Compound Interest

Calculating compound interest takes four numbers and one formula. This guide shows the method step by step, works through a full example, and explains how to do the same calculation in a spreadsheet.

Step 1: Gather the four inputs

• P — the principal (starting amount).
• r — the annual interest rate as a decimal. Divide the percentage by 100: 3.5% → 0.035.
• n — the number of compounding periods per year: annually 1, semi-annually 2, quarterly 4, monthly 12, daily 365.
• t — the time in years. Convert months by dividing by 12.

Step 2: Apply the formula

A = P × (1 + r/n)n × t

Work from the inside out:

1. Divide the rate by n to get the rate per period.
2. Add 1.
3. Multiply n × t to get the number of periods.
4. Raise the result of step 2 to that power.
5. Multiply by P.

Step 3: Subtract the principal

Compound interest = A − P

Worked example

$2,500 is invested at 3.5% per year, compounded quarterly, for 7 years.

1. P = 2,500; r = 0.035; n = 4; t = 7.
2. Rate per quarter: 0.035 ÷ 4 = 0.00875.
3. Add 1: 1.00875.
4. Number of quarters: 4 × 7 = 28.
5. Growth factor: 1.00875²⁸ = 1.276261.
6. Final amount: 2,500 × 1.276261 = $3,190.65.
7. Compound interest: 3,190.65 − 2,500 = $690.65.

Calculating in Excel or Google Sheets

With P in cell B1, the rate (as a percentage, e.g. 3.5%) in B2, n in B3 and t in B4:

=B1*(1+B2/B3)^(B3*B4)

Or use the built-in future value function (the minus sign is because FV treats the deposit as money paid out):

=FV(B2/B3, B3*B4, 0, -B1)

The FV function can also handle regular deposits — put the periodic deposit (as a negative number) in the third argument, and 1 in a fifth argument if deposits are made at the beginning of each period.

Calculating with regular deposits

If you also add the same amount every period, add the future value of those deposits:

FV = P(1 + i)N + C × [(1 + i)N − 1] ÷ i

where i = r/n is the rate per period, N = n × t is the number of periods and C is each deposit at the end of a period. Multiply the second part by (1 + i) if deposits are made at the start of each period. Our contributions calculator handles this and different deposit frequencies automatically.

Common mistakes

• Using the percentage (3.5) instead of the decimal (0.035).
• Forgetting to divide the annual rate by n.
• Using years instead of periods as the exponent.
• Entering an APY and then compounding it again. If you have an APY, use n = 1.
• Rounding intermediate results.

Check your answer

Enter the same numbers in the Compound Interest Calculator. Its Calculation breakdown shows each step with your numbers, so you can see exactly where any difference comes from.