Use the calculator below to estimate your cumulative interest over time.
How do you calculate cumulative interest?
Cumulative interest is calculated by summing up the interest earned or paid over a specified period of time. To calculate it, you typically use the formula:
Where:
- P = Principal amount (initial sum of money)
- r = Annual interest rate (in decimal form)
- n = Number of times interest is compounded per year
- t = Time the money is invested or borrowed for (in years)
This formula accounts for both the principal and previously earned interest, giving you the total amount of interest accumulated over time.
What is the difference between interest and cumulative interest?
Interest is the amount earned or paid on the principal amount over a given period, often calculated for a specific time frame (such as monthly or annually).
Cumulative interest, on the other hand, is the total amount of interest earned or paid over the entire duration of the investment or loan. It takes into account all previous interest that has been added to the principal, effectively compounding over time.
How does cumulative interest work?
Cumulative interest works by adding the interest earned in each period to the principal balance. In subsequent periods, interest is calculated on the new total (original principal plus previously earned interest). This process, called compounding, allows interest to grow over time, and the longer the time frame, the more the cumulative interest builds.
For example, if you invest money in a savings account with compound interest, each time interest is added, the amount in the account increases, and the next interest calculation is based on the updated balance. This creates a snowball effect where both your principal and previously earned interest generate additional interest over time.