How Do You Calculate Monthly Compounded Interest?
Banks pay you money for the use of your money. That’s the idea behind savings accounts and certificates of deposit. How much your money earns is the interest rate. A simple interest rate is just the percentage of the money you invest that the bank pays you per year. If it’s 6 percent, you’d be paid $60 for $1000 on deposit for a year. However, banks and other financial institutions don’t wait an entire year before paying you any interest. Instead, it’s divided into smaller amounts deposited periodically into your account. That’s good for you, because then the added interest starts earning more interest—and that’s what compound interest means. Figure the monthly interest rate. Divide the annual interest rate by 12. For example, if the annual interest rate is 6 percent, the monthly interest rate is 6 percent/12, or 0.50 percent. If you were calculating daily compounded interest, you’d divide the annual rate by the 365 days in a year instead of 12. Multiply your principal, which is the
