How to Calculate Compound Interest Step-by-Step (2026 Guide)
Compound interest is often described as “interest on interest.”
But very few investors actually know how to calculate it.
Understanding the math behind compounding gives you confidence, clarity, and long-term discipline. Once you see how the numbers grow, investing becomes logical — not emotional.
Let’s break it down step-by-step.
Watch the full visual explanation here:
Step 1: Understand the Compound Interest Formula
The basic formula is:
A = P (1 + r)^t
Where:
A = Final amount
P = Principal (initial investment)
r = Annual interest rate (decimal)
t = Time in years
Example:
If you invest $10,000 at 8% annually for 10 years:
A = 10,000 (1 + 0.08)^10 A ≈ 21,589
Your money more than doubles.
Step 2: Add Monthly Contributions
Most investors don’t invest once. They invest monthly.
For recurring investments, the formula becomes:
Future Value = P (1 + r)^t + PMT × [((1 + r)^t − 1) / r]
Where:
PMT = Monthly contribution
Example:
Invest $500 per month at 8% annually for 20 years.
Your total contributions: $500 × 12 × 20 = $120,000
But your final value ≈ $294,000+
Nearly $174,000 comes from compounding — not your pocket.
