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 interest is earned on interest, leading to exponential growth over time.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

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

Explanation: The more frequently interest is compounded, the greater the return, as interest is calculated on an increasingly larger principal.

3. Importance of Compounding

Details: Compounding can significantly impact investment growth over time. Even small differences in compounding frequency can lead to substantial differences in final amounts for long-term investments.

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, while compound interest is calculated on principal plus accumulated interest.

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

Q3: What's a realistic interest rate for savings?
A: As of 2023, high-yield savings accounts typically offer 3-5% APY, but this varies with economic conditions.

Q4: Can I use this for investments other than savings?
A: Yes, the formula applies to any investment with compound growth, though actual returns may vary with market conditions.

Q5: How accurate is this calculator?
A: It provides mathematical projections but doesn't account for taxes, fees, or changing interest rates.