Compound Interest Formula in Excel with Examples (2024)

Compound interest is defined as “the interest on savings calculated on both the initial principal and the accumulated interest from previous periods.” Classically, known as “interest on interest”, this is the most common type interest used in every day finance situations.

To calculate compound interest

• on principal amount P
• at the rate of interest R
• for the number of years N
• and compounded T times per year
• we can use the formula = P*(1+R/T)^(N*T)

In this article, let me explain the necessary Excel formulas to calculate compound interest using your data.

Let’s say you borrow $5,000 at 5% interest rate for 10 years. The compounded value at the end of 10 years can be calculated with below Excel formula.

• Cell D4 has principal value: $5000
• Cell D5 has interest rate: 5%
• Cell D6 has years: 10

It is common for compounding to be done more than once per year. In such cases, you can use below Excel formula logic to calculate the compound interest.

Below example shows compounding 4 times per year (ie, once every quarter).

If you want to calculate the effect of compounding every ‘x’ months, you can just below logic.

Instead of using the P*(1+R/T)^(N*T) formula, you can use the FV () function (Future Value) to calculate the compounded value over time.

Here are a few examples:

Simple interest is defined as Principal x Interest Rate. It doesn’t change over time.

On the other hand, Compound Interest changes over time, as we calculateinterest ON interest too.

Here is a quick demo of how Simple & Compound Interests compare over 20 years time, for $5,000 borrowed at 5% rate of interest.

“Compounding Effect”or that rapid growth of money over time often surprises people.

Imagine investing $5,000 at 5%, compounded annually for 20 years. Below table shows the effect of compounding on your money.

You might think how often we compound would have an impact on the final value. But it does little.

For example, if we compare the outputs of $5,000 compounded at 5% at various frequencies, at the end of 20 years, the values would be:

• Once a year compounding: $13,266.49
• Twice a year: $13,452.32
• 4 Times a year: 13,507.42
• 6 Times a year: $13,535.21
• Every month (12 times): $13,563.20
• Every week (52 times): $13,584.88
• Every day (365 times): $13,590.48

The value hardly changes.

Below table shows how this looks over various time periods.

Interest rate on the other hand has a dramatic effect on the result of compounding.

For example, $5000 invested at 8% will be almost $11 million in a century!

Compounding is CRAZY!!!
$5,000 invested today at 1% interest would be worth $13,500 in 100 years.
Same money, but invested at 8% would be a whopping $10.9 million!

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We can use Excel to figure out the compounded value with regular payments easily.

For example, if you invest

• $500 every month
• at 8%
• for 20 years

the final amount will be $294,510.21

To calculate this you can use the FV function, as shown below:

RULE OF 72
To find out how long it takes for your money to double, divide 72 with rate of interest.
For example, at 8% interest rate, your money will double in 72/8 = 9 years.

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You can use this when you don’t have the luxury of Excel or a calculator nearby to quickly calculate how long it takes for your money to double.

But what if I want to calculate the EXACT time it takes?

In such cases, you can use the formula =LOG(2) / LOG(1+Rate of Interest).

We can use the PV (Present Value) function in Excel to calculate the principal value, given a compounded value.

For example, you want to save $100,000 for your daughter’s wedding, which you expect to be in 20 years. You expect the rate of interest to be 5%.

You want to know how much to save now to get $100k after 20 years.

Using the PV function as below, we can get that result.

And we can use the PMT function to calculate reverse of the regular compounding.

Going back to the “saving for daughter’s wedding” case, you want to save up $100k for your daughter’s wedding in 20 years. You expect the interest rate to be 5%.

How much should you save every year?

or every month?

We can use the PMT function to figure out the regular amounts.

Need to understand these formulas better?

Check out my quick and to-the-point video on Calculating Compound Interest in Excel.