1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It causes wealth to grow faster than simple interest, where interest is calculated only on the principal amount.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (years)

Explanation: The formula shows how money grows when earnings are reinvested to earn additional returns over time.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, retirement savings, and investment decisions. It demonstrates the power of time and consistent investing.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage, time in years, and select compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What's the Rule of 72?
A: A quick way to estimate how long it takes to double your money: divide 72 by the interest rate. For example, at 6% it takes about 12 years (72/6).

Q4: Can compound interest work against me?
A: Yes, with loans and credit cards, compound interest can make debt grow quickly if not paid down.

Q5: How can I maximize compound interest benefits?
A: Start investing early, reinvest earnings, and choose accounts with higher compounding frequencies.