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Compound Interest Formula:
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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.
The calculator uses the compound interest formula:
Where:
Explanation: The more frequently interest is compounded, the greater the return on investment due to the "interest on interest" effect.
Details: Understanding compound interest is crucial for financial planning, retirement savings, and investment decisions. It demonstrates how small, regular investments can grow significantly over time.
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.
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 (e.g., monthly vs. annually) results in higher returns due to more frequent application of interest.
Q3: What's the Rule of 72?
A: A simple way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your money.
Q4: How important is the interest rate in long-term growth?
A: Small differences in rates have huge impacts over decades. A 1% higher rate can significantly increase final amounts.
Q5: Should I prioritize higher compounding or higher rate?
A: Generally, a higher rate has more impact than more frequent compounding, but both factors matter.