Compound interest is interest that is earned not only on the underlying principal investment, but on the accruing interest that is paid to that principal as well. When it comes to investment vehicles, compound interest is usually calculated on a daily, monthly or yearly basis. The more often the interest is compounded, the more money the investor will make for a given interest rate. Understanding how to calculate compound interest on a financial calculator will help you shape your financial future by predicting various outcomes for your investment vehicles.
Understand the variables you need to calculate compound interest. The equation for calculating compound interest is as follows:
A = P ( 1 + ( r / n ) ) ^ nt
In this equation, A equals the amount you will have at the end of the term, P equals the principal you originally invested, r equals the interest rate you are receiving, n equals the number of times the interest is compounded over the year, and t equals the amount of years the interest is being compounded for during the calculation.
While you will not be manually performing this calculation, you will need to know all of the variables except for A to use the financial calculator to figure out your compound interest on an investment vehicle.
Plug the numbers into a financial calculator. The financial calculator will ask for each one of these values including the principal, interest, years of investment and the amount of times that investment is compounded per year. For example, say that you invested $5,000 in a CD that compounded monthly at 6 percent interest for five years. Each of these numbers would be placed into the financial calculator.
Manually the equation would read:
A = $5,000 r ( 1 + (.06 / 12) ^ (12 x 5)
Notice that the interest rate has been converted to decimal form.
Calculate the compound interest. After placing each of the example numbers into the financial calculator, the answer would be $6,744.25.
Adjust the numbers accordingly for your investment vehicles to calculate the compound interest you can expect to receive.
An algebra calculator will also be able to solve this problem by plugging in the written manual equation.
- 1728: Compound Interest Calculator
- DePaul: Compound Interest Formula
- Office of the Comptroller of the Currency. "Truth in Lending." Accessed April 25, 2020.
- Federal Register. "Federal Financial Institutions Examination Council: Administrative Enforcement of the Truth in Lending Act—Restitution," Pages 1-2. Accessed April 25, 2020.
- An algebra calculator will also be able to solve this problem by plugging in the written manual equation.
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