Compound Interest Guide
Compound Interest Formula Explained
Understand the compound interest formula A = P(1 + r/n)^(nt) without needing advanced math.
The basic formula
The standard compound interest formula is A = P(1 + r/n)^(nt). A is the future value, P is the principal, r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years.
The formula may look technical, but the idea is simple: the balance grows by a small percentage each compounding period, and each new period starts from the latest balance.
What each letter means
P is the starting amount. If you begin with $10,000, then P is 10,000. The r value is the annual rate written as a decimal, so 7% becomes 0.07. The n value depends on how often interest is compounded: monthly compounding uses 12, quarterly uses 4, and annual uses 1.
The exponent nt tells the formula how many compounding periods happen across the full time period.
Recurring contributions add complexity
When you add money every month or every year, the formula becomes more complex because each contribution has a different amount of time to grow. A contribution made in year one has more time to compound than a contribution made near the end.
That is why this calculator uses period-by-period projection logic for recurring contributions instead of showing only the single-deposit formula.