- 1). Record the initial balance of your account -- generally the initial deposit you make to the account. Assume for this example that the initial balance in your account is $6,000.
- 2). Obtain the interest rate from the bank. Banks generally provide the interest rates on an account as an annual percentage rate, or APR. Assume for this example that the APR on the account is 8 percent.
- 3). Divide the APR of the account by 100 to obtain the annual interest rate on the account. The APR on the account in this example is 8 percent, so the annual interest rate is 8 / 100 = 0.08.
- 4). Obtain the compounding period from the bank. The compounding period is generally the interval between interest payments. Bank accounts typically pay interest to an account on a quarterly basis, so the compounding period in this example is three months.
- 5). Divide the annual interest rate by the number of compounding periods in the year to obtain the interest rate for the compounding period. The annual interest rate in this example is 0.08 and a year contains four compounding periods, so the interest rate for the compounding period is 0.08 / 4 = 0.02.
- 6). Calculate the balance in the account at the end of the year with the formula B = A x (1 + I)^N. B is the ending balance, A is the initial balance, I is the interest rate for the compounding period and N is the number of compounding periods in the year. The ending balance in this example is B = A x (1 + I)^N = 6,000 x (1 + 0.02)^4 = $6,494.59.
- 7). Subtract the balance at the end of the year from the initial balance to obtain the compound interest for the year. The ending balance in the account is $6,494.59 and the initial balance in the account was $6,000, so the compound interest for this account is $6,494.59 - $6000 = $494.59.
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