1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It differs from simple interest in that it includes interest on interest, leading to exponential growth.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

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

Explanation: The formula calculates how much interest will be earned when interest is compounded multiple times per year over a certain period.

3. Importance of Interest Calculation

Details: Understanding compound interest helps in financial planning, comparing different investment options, and estimating future value of savings.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a decimal (e.g., 5% = 0.05), number of compounding periods per year (e.g., 12 for monthly), and time in years.

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 often do checking accounts typically compound interest?
A: Most checking accounts compound interest daily or monthly, but this varies by financial institution.

Q3: Does this calculator account for additional deposits?
A: No, this calculates interest for a single initial deposit. For multiple deposits, use a future value calculator.

Q4: Why is my actual interest slightly different?
A: Actual results may vary due to rounding methods, fees, or different compounding methods used by banks.

Q5: How can I maximize my interest earnings?
A: Look for accounts with higher interest rates and more frequent compounding periods, and consider keeping more money in your account.