How to Calculate Compound Interest (With Examples)

Compound interest is interest calculated on both the initial principal and on the interest that has already accumulated. It is the reason small, regular savings can grow into life-changing amounts over a few decades.

The compound interest formula

The basic formula is A = P(1 + r/n)^(nt), where P is the starting amount, r is the annual interest rate (as a decimal), n is the number of times interest is compounded per year, and t is the number of years.

For monthly compounding — by far the most common case — n = 12. If you also make regular monthly contributions, you add the future value of an annuity: PMT × ((1 + r/n)^(nt) − 1) / (r/n).

A worked example

Suppose you invest £5,000 today and add £200 every month at a 6% annual return for 20 years. After 240 months, your starting £5,000 grows to roughly £16,500 on its own. The monthly contributions add another ~£92,500. Total: about £109,000 — of which £53,000 is interest you earned, not money you paid in.

Why time matters more than amount

Doubling your contribution shortens the journey, but doubling the years can multiply the result. Starting 10 years earlier with half the contribution usually beats starting later with twice as much.