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 more frequently interest is compounded, the greater the return, as interest is earned on interest more often.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning, retirement savings, and comparing different investment options.

4. Using the Calculator

Tips: Enter principal in USD, annual interest rate as a percentage, number of compounding periods per year, and investment time in years. 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 amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (daily vs. annually) results in higher returns due to the "interest on interest" effect occurring more often.

Q3: What's a typical compounding frequency for savings accounts?
A: Most savings accounts compound interest daily and credit it monthly.

Q4: How can I maximize compound interest?
A: Start early, invest regularly, choose higher compounding frequencies, and reinvest all earnings.

Q5: Does this calculator account for additional contributions?
A: No, this calculates compound interest on a single principal amount only.