Monthly Compound Interest Formula

Compounded Monthly Formula

Let's look at how to compute compound interest on a monthly basis. You will need figures for the principal amount, annual interest rate, the time factor, and a number of compound periods to use the compound interest formula. Once you've gathered those, you can begin the process of calculating compound interest.

The formula for compound interest, including principal sum, is written as: A = P (1 + r/n)\[^{nt}\]

Where:

A = the investment/future loan's value, including interest

P denotes the initial investment amount (the initial deposit or loan amount)

r denotes the annual interest rate (decimal)

n denotes the number of times interest is compounded per unit t.

t = the amount of time that money is invested or borrowed for.

It's important to note that this formula calculates the future value of an investment or loan as compound interest plus principal. If you only want to calculate compound interest, you must subtract the principal from the result. So, your formula is as follows:

Compounded interest-only (without principal)is represented as - P (1 + r/n)\[^{nt}\] - P

 

Consider the Following Example:

If $5,000 is deposited into a savings account at a 5% annual interest rate, compounded monthly, the value of the investment after ten years can be calculated as follows...

P = 5000.

r = 5/100 = 0.05 (decimal).

n = 12.

t = 10.

If we plug those figures into the known formula, we get the following:

A = 5000 (1 + 0.05 / 12) (12 * 10) equals 8235.05.

So, the investment balance after 10 years is equal to $8,235.05.

 

Benefits of Compound Interest

Compound interest is a more efficient way of earning money than simple interest, which only applies to your initial deposit.

For example, if you had $25,000 in a savings account earning 4% p.a., you'd have $30,000 in 5 years.

If you had the same $25,000 in a savings account earning 4% p.a. compounded monthly, you would have $30,525. That's $500 more in your pocket with no effort on your part.

To illustrate, the graph below depicts the outcome of $1000 invested over 20 years at a 10% interest rate. The main figure is shown in green. The blue portion of the graph depicts the result of 10% interest without compounding.

Finally, the part that is in purple colour demonstrates the benefit of compound interest over those 20 years.

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FAQs (Frequently Asked Questions)

Q.1. What is the Cumulative Interest Formula?

Answer. The term "cumulative" refers to the fact that dividends accumulate over time and will be paid in the event of a liquidity event. Cumulative dividends can be computed in either a simple or compounding manner. The term "compounding" refers to the dividend being calculated using the original per share price plus any dividends that have accrued over time.

Q.2. What is Interest Compounded Monthly?

Answer. In practice, interest is frequently compounded more than once a year. In many cases, the interest is known to be compounded monthly, which means that it is added back to the principal each month.

Q.3. What is a Simple Interest Formula for Months?

Answer. Simple Interest Formula:

  1. If the loan or investment term is measured in months, you can apply the following formula. P x R x T = Simple Interest (100 x 12)

  2. You can use the formula below to calculate the amount you need to pay at the end of the tenure or the amount you will receive at the end of the maturity period.

Q.4. What is the Monthly Interest Formula?

Answer. Divide the annual interest rate by 12 months to get the monthly interest. The monthly interest rate will be the result. Because interest is compounded at a monthly rate, the total number of periods is calculated by multiplying the number of years by 12 months.