Bankrate Compound Interest Calculator

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Principal Amount (P):

USD

Annual Interest Rate (r):

Compounds Per Year (n):

Time (t):

years

Future Value (A):

Total Interest Earned:

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1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It causes wealth to grow faster than simple interest, which is calculated only on the principal amount.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Where:

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

Explanation: The formula accounts for periodic compounding by dividing the annual rate by the number of compounding periods and raising to the power of total periods.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning, retirement savings, and evaluating investment opportunities. It demonstrates how small, regular investments can grow significantly over time.

4. Using the Calculator

Tips: Enter principal in USD, annual interest rate as a percentage (e.g., 5 for 5%), number of compounding periods per year (e.g., 12 for monthly), and 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 often should interest compound for maximum growth?
A: More frequent compounding (daily instead of annually) results in slightly higher returns due to the compounding effect.

Q3: What's a typical compounding frequency?
A: Savings accounts often compound daily, CDs monthly or quarterly, and bonds typically compound semiannually.

Q4: How does time affect compound interest?
A: The longer the time period, the more dramatic the compounding effect becomes due to exponential growth.

Q5: 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.