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 because you earn interest on interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of 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 (years)

Explanation: The more frequently interest is compounded, the greater the return due to the compounding effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning. Small differences in interest rates or compounding frequency can lead to significant differences in returns over time.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as percentage, time in years, and select compounding frequency. 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 (e.g., monthly vs. annually) results in higher returns due to the interest-on-interest effect.

Q3: What's the Rule of 72?
A: A simple way to estimate how long an investment will take to double: divide 72 by the annual interest rate.

Q4: Are there tax implications?
A: Yes, interest earned is typically taxable income unless in a tax-advantaged account like an IRA or 401(k).

Q5: How accurate is this calculator?
A: It provides mathematical projections but doesn't account for changing rates, additional contributions, or withdrawals.