There is a basic formula that is used to calculate compound interest. The formula is as follows:

FV = PV(1 + r)n

FVis the amount of money accumulated after n years, including interest.

PVis the principal (the initial amount you borrow or deposit)

ris the annual rate of interest (percentage)

nis the number of periods, or how many times the interest is compounded

Okay, so now you have the formula, but exactly what is compound interest? Let us take a look at a bank account. If you make a deposit into an interest earning account, the bank pays you interest on your deposit. When your money is held at a financial institution, that institution pools your money with other depositors’ money and then uses the pooled amount to fund loans and mortgages. The banks therefore pays you interest as a thank you for letting them use your money.

In a simple interest bearing account, the bank will pay you interest on the amount of money you deposit. Every time the interest is figured, it is figured based on only the amount of money that you have put in. So, if you deposit one hundred dollars and never make another deposit, the interest will always be figured based on that $100.

In a compound interest bearing account, the bank pays you interest on the amount you have deposited, PLUS the amount of interest that they have previously paid to you. If you originally deposit one hundred dollars and the interest paid to you is $3, your total balance will be $103. Next time the bank calculates interest, it will be based on the $103 balance instead of just the original deposit of $100.

In order to figure out how much money you will be getting from the money you are ‘loaning’ the bank, you can use the above formula. The formula may seem confusing to some, so an easier way to figure the interest you will be receiving is to use a scientific calculator. With this, you simply type in the formula and corresponding numbers and the calculator does the work of figuring your interest earnings. Another way to find out your earnings is to use an online calculator. This is perhaps the easiest way of all as you simply enter your numbers into the box and click a single button. Voila!