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, where interest is calculated only on the principal amount.

2. How the Calculator Works

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: More frequent compounding leads to higher returns as interest is earned on interest more often.

3. Importance of Compounding

Details: The power of compounding can significantly increase savings over time. Starting early allows more time for compounding to work, making small regular investments grow substantially.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a 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 APR and APY?
A: APR is the annual rate without compounding, while APY includes the effects of compounding. APY will be higher than APR when interest compounds more than annually.

Q2: How often do savings accounts compound?
A: Most savings accounts compound interest daily and credit it monthly, but this varies by institution.

Q3: Why does compounding frequency matter?
A: More frequent compounding results in higher returns. Daily compounding yields more than monthly, which yields more than annual compounding.

Q4: How can I maximize compound interest?
A: Start early, invest regularly, choose accounts with higher rates and more frequent compounding, and reinvest dividends/interest.

Q5: Is compound interest taxed?
A: Yes, in most cases the interest earned is taxable income in the year it's credited to your account.