Methodology
How we calculate compound interest
Our methodology for the Compound Interest calculator: the formula, step-by-step calculation, authoritative sources, and limitations. Reviewed quarterly.
Formula
A = P(1 + r/n)^(nt)
Step-by-step
- 1
Identify the principal (P): the initial deposit or investment.
- 2
Identify the annual interest rate (r) as a decimal (5% → 0.05).
- 3
Identify the compounding frequency (n): annually = 1, quarterly = 4, monthly = 12, daily = 365.
- 4
Identify the time in years (t).
- 5
Compute (1 + r/n): the per-period growth rate.
- 6
Raise that to the power n×t: the total number of compounding periods.
- 7
Multiply by P: that is the future value (A). Subtract P to get interest earned.
Authoritative sources
Every claim on this page is backed by an authoritative source.
Assumptions
What we take to be true when applying this formula.
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The interest rate is constant. Real rates change with market conditions.
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All interest is reinvested (not withdrawn). Withdrawals reduce compounding.
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No additional contributions. For recurring deposits, the formula becomes a series of compounding events.
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No taxes on the interest. Tax-advantaged accounts (401k, IRA) defer or eliminate this.
Limitations
What this method does NOT capture.
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Real returns are usually lower than nominal returns due to inflation. Use the inflation calculator to see the real value.
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Investment returns are not constant. The model assumes a fixed rate; actual investments fluctuate.
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Tax drag (capital gains, dividends) reduces actual compounded growth.
Last reviewed: 2026-06-15 • Reviewed by: CalcxApp editorial team