How do you calculate interest earned?

Answer by  john11 (617)

Interest earned is compounded over a unit of time. If you earn 12% interest per year, the interest earned in 5 years is principle*1.12*1.12*1.12*1.12*1.12-principle = principle*((1+.12)^5-1) = principle*(1.76234168-1) = 0.76*principle. So you earned that much in 5 years. If the interest is paid every month instead and you wait fives year (60 months), then you get principle*((1+.12/12)^(12*5)-1) = 0.82*principle (better).

Answer by  robin99 (17)

You'll know how much of your final balance is due to interest earnings, and you can use the compound interest calculator to see how different interest rates affect the outcome.