## What is Compound Interest?

**Compound interest** is interest calculated on two things:

- a
**principal amount** - any
**accumulated interest**

## How to Calculate Compound Interest

Using the **compound interest** concept, we can calculate what a principal amount P turns into using the following equation:

Where:

**A**: future amount**P**: principal amount**r**: annual interest rate**n**: number of compounding periods**t**: number of years

The **compound interest** generated is the difference between the future amount and the principal amount.

## Example 1

If $2,000 are invested at 8% compounded quarterly, the future amount at the end of 5 years will be:

The **compound interest** generated is $2,971.89 – $2,000 = $971.89.

## Example 2

If $100,000 are invested in the S&P 500 for 35 years, and the average annual compounded return is 9%, the future amount will be:

The **compound interest** generated is $2,041.396.79 – $100,000 = 1,941,396.79.