Albert Einstein is rumored to have said that compound interest is the most powerful force in the universe. While some may doubt that he actually uttered those words, the sentiment remains. Periodic compound interest allows your money to grow faster than simple interest ever could, because the interest also earns money. Of course, there's a flip side to this wonderful economic force: If you take out a loan, which uses periodic compound interest, your debt will also compound. Using the formula for periodic compound interest, you can calculate exactly how much interest you earn or pay over a certain period of time.
1. Divide your annual interest rate, in decimal format, by the number of periods per year. As an example, if you had a savings account that earned 5 percent per year, but compounded monthly, you would divide 0.05 by 12 to get 0.0041667.
2. Add one to this figure. In the example, you would have 1.0041667.
3. Raise that figure to the nth power, where n is the number of years in the investment or loan times the number of periods in a year. In the example, if you held the account for 10 years, then you would raise 1.0041667 to the power of 120 to get 1.647016.
4. Multiply this figure by the amount invested. This tells you how much the investment is worth at the end of your time period. In the example, if you invested $10,000, you would have $16,470.16.
5. Subtract the amount originally invested to determine how much of that was interest. In the example, you gained $6,470.16 in interest alone.
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