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Monthly Compounding Formula:
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Monthly compounding means that interest is calculated and added to the principal balance each month. This results in earning "interest on interest," which can significantly increase investment growth over time compared to simple interest.
The calculator uses the monthly compounding formula:
Where:
Explanation: The formula accounts for interest being calculated and added monthly, which accelerates growth compared to annual compounding.
Details: Compounding is a powerful force in investing. The more frequent the compounding (monthly vs. annually), the greater the returns. Over long periods, compounding can turn modest investments into significant sums.
Tips: Enter the principal amount in CAD, annual interest rate as a percentage (e.g., 5 for 5%), and time period in years. The calculator will show the final amount and total interest earned.
Q1: How does monthly compare to annual compounding?
A: Monthly compounding yields higher returns than annual compounding at the same rate because interest is calculated and added more frequently.
Q2: Are Canadian bank accounts compounded monthly?
A: Many Canadian savings accounts compound interest monthly, but terms vary by institution. Always check with your bank.
Q3: What's the difference between nominal and effective rates?
A: The nominal rate is the stated rate. The effective rate (including compounding) will be higher. For monthly compounding: \( (1 + r/12)^{12} - 1 \).
Q4: How does inflation affect these calculations?
A: This calculator shows nominal returns. For real (inflation-adjusted) returns, subtract expected inflation from the interest rate.
Q5: Are investment returns taxed in Canada?
A: Yes, investment income is taxable. Interest income is fully taxable at your marginal rate in non-registered accounts.