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 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 (higher n) leads to greater returns. The formula accounts for exponential growth over time.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning, retirement savings, and investment decisions. It demonstrates the power of time and consistent returns.

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as percentage, time in years, and select compounding frequency. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: How does compounding frequency affect returns?
A: More frequent compounding (e.g., daily vs. annually) yields higher returns due to interest being calculated on interest more often.

Q2: What's the difference between APR and APY?
A: APR is the annual rate without compounding, while APY includes compounding effects. This calculator shows APY-like results.

Q3: How can I maximize compound interest?
A: Start early, invest regularly, choose higher compounding frequencies, and reinvest dividends/interest.

Q4: Does this work for debt too?
A: Yes, compound interest applies to loans and credit cards, which is why minimum payments can take years to pay off.

Q5: What about taxes and inflation?
A: This shows gross returns. Real returns would subtract taxes and inflation, but the fundamental compounding effect remains.