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 Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time the money is invested for (in years)

Explanation: The formula calculates how much an investment grows when interest is compounded over multiple periods.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investment decisions, and retirement savings. It demonstrates how money can grow exponentially over time.

4. Using the Calculator

Tips: Enter principal in USD, annual interest rate as a decimal (e.g., 0.05 for 5%), number of compounding periods per year, and time in years. All values must be positive.

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 leads to higher returns. Daily compounding yields more than monthly, which yields more than annual compounding.

Q3: What's the Rule of 72?
A: It's a quick way to estimate how long it takes for an investment to double: divide 72 by the annual interest rate.

Q4: Can compound interest work against you?
A: Yes, with loans and credit cards, compound interest can cause debt to grow rapidly if not paid down.

Q5: How can I maximize compound interest?
A: Start early, invest regularly, reinvest dividends/interest, and choose investments with higher compounding frequencies.