Compound interest on a savings account is more favorable to the saver than simple interest because as the interest is added to your account, it begins to accrue additional interest. The compound interest formula takes this into consideration. Knowing the amount of interest that will accumulate, either on a savings account or a loan, will help you better budget for the future. For example, if you are saving for a future purchase, using the compound interest formula will help you better estimate how much you need to save.
Divide your annual interest rate by two to find the semiannual interest rate. For example, if your annual interest rate is 4.9 percent, you would divide 0.049 by 2 to get a semiannual interest rate of 0.0245.
Add 1 to the semiannual interest rate. Here, you would add 1 to 0.0245 to get 1.0245.
Multiply the Step 2 result by itself for the same number of times as the number of semiannual periods the money will accrue interest. For this example, if the money were going to accrue interest for 18 months, or three semiannual periods, you would multiply 1.0245 by 1.0245 by 1.0245 to get 1.07531546.
Subtract 1 from the Step 3 result to find the total return. Here, you would subtract 1 from 1.07531546 to get 0.07531546.
Multiply the total return by the original principal to find the interest accumulated. Here, if you started with $7,240, you would multiply $7,240 by 0.07531546 to find that $545.28 in interest, rounded off, would have accumulated.
Things You'll Need
Pen and paper