Article: The formula for this calculation is more complex. With compound interest, the accumulated interest is added back to the principal each payment period. Then interest for the current year is calculated on the principal plus the accumulated interest. Since the interest grows exponentially, you must use an exponential formula to calculate the future value. The formula for future value with compound interest is FV = P(1 + r/n)^nt. FV = the future value; P = the principal; r = the annual interest rate expressed as a decimal; n = the number of times interest is paid each year; and t = time in years. Interest can be compounded annually, semiannually, quarterly, monthly or daily. This determines the number of compounding periods in the year. Suppose you invested $5,000 in an account that paid 5 percent interest compounded annually for eight years. In this example, since the interest is compounded annually, there is one compounding period. In the equation, P = $5,000; r = .05 (5 percent expressed as a decimal); n = 1; t = 8. FV = 5000(1 + .05/1)^(1*8) = 5000(1.05)^8 = 5000 x 1.48 = 7387.28 At the end of eight years, the investment would be worth $7,387.28. The annual interest rate and the compounding periods are adjusted for the number of times interest is paid within the year period. In this example, the principal is $5,000, the interest rate is .05 (5 percent expressed as a decimal) and the time is eight years. But the number of compounding periods is four since there are four quarters in a year. FV = 5000(1 + .05/4)^(4*8) = 5000 (1.0125)^32 = 5000 x 1.49 = 7440.65 The future value of the investment would be $7,440.65.

What is a summary?
Learn the formula for calculating future value with compound interest. Calculate the future value of money using the formula. Calculate the future value of the same investment if the interest rate were calculated quarterly.