1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's what makes investments grow exponentially over time, often referred to as "interest on interest."

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

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

Explanation: The formula shows how your investment grows when earnings are reinvested to generate their own earnings.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the return. Daily compounding yields more than monthly, which yields more than annual compounding for the same rate and time period.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), time in years, and select compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does this compare to simple interest?
A: Simple interest only earns on the principal. Compound interest earns on both principal and accumulated interest, leading to exponential growth.

Q2: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your investment.

Q3: How important is the interest rate?
A: Small rate differences have huge impacts over time. A 1% higher rate can significantly increase final amounts over decades.

Q4: What about inflation?
A: This calculator shows nominal returns. For real returns, subtract inflation rate from the interest rate.

Q5: Can I use this for debt calculations?
A: Yes, the same formula applies to compound interest on loans, though results will show how much you owe rather than earn.