The compound interest formula
A = P × (1 + r ÷ n)n × t
A is the final amount, P the principal, r the annual rate as a decimal, n the number of compounding periods per year and t the number of years. For 5,000 at 5% compounded monthly for 10 years: A = 5,000 × (1 + 0.05 ÷ 12)120 = 8,235.05.
Simple versus compound interest
Simple interest is paid only on the principal. Compound interest is paid on the principal and on interest already earned, so the balance grows faster each year.
APY and the Rule of 72
The annual percentage yield (APY) is the effective yearly rate once compounding is included: 5% compounded monthly is an APY of 5.116%. To estimate how long money takes to double, divide 72 by the interest rate: at 6% it takes about 12 years.
Results are estimates for planning. They are not financial advice and do not include every fee a lender or provider may charge.