Quick Answer
Compound interest is calculated using A = P(1 + r/n)^(nt), where P is the initial principal, r is the annual interest rate, n is the number of times interest compounds per year, and t is the number of years.
What Is a Compound Interest?
Compound interest is interest calculated not just on your original principal, but also on all the interest that has accumulated in previous periods. This is fundamentally different from simple interest, where interest is only ever calculated on the original amount.
The effect of compounding is often described as 'interest earning interest' — and over long time horizons, this effect becomes dramatic. Albert Einstein is widely (though apocryphally) quoted as calling compound interest 'the eighth wonder of the world,' and while the quote's origin is disputed, the underlying math is very real: money compounding at even modest rates can grow substantially over 10, 20, or 30 years.
Compound interest works both for you and against you. It's the mechanism behind growing savings accounts, mutual funds, and retirement investments — but it's also the mechanism behind credit card debt growing faster than expected if only minimum payments are made.
How to Use This Compound Interest
- 1Enter your initial principal (the starting amount you're investing or saving).
- 2Enter the annual interest rate offered.
- 3Select how often interest compounds — daily, monthly, quarterly, or annually.
- 4Enter the number of years you plan to leave the money invested.
- 5The calculator shows your final balance and the total interest earned.
The Formula Explained
A = P × (1 + r/n)^(n×t)A = final amount, P = principal, r = annual rate (decimal), n = compounding periods per year, t = years
Interest = A − PExample: PKR 100,000 invested at 10% annual interest, compounded monthly, for 5 years
- P = 100,000, r = 0.10, n = 12, t = 5
- A = 100,000 × (1 + 0.10/12)^(12×5)
- A = 100,000 × (1.00833)^60
- A ≈ 164,530
Tips & Things to Know
- More frequent compounding (daily or monthly vs. annually) results in slightly higher returns at the same stated annual rate — always check the compounding frequency when comparing investment products.
- Time is the single biggest lever in compound growth — starting to invest even a few years earlier often outweighs the benefit of a higher interest rate over the same horizon.
- Compound interest applies to debt too — credit cards typically compound daily, which is why balances can grow quickly if only minimum payments are made.
- The 'Rule of 72' is a quick mental shortcut: divide 72 by the annual interest rate to estimate how many years it takes for an investment to double.