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, especially over long periods.

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: The more frequently interest is compounded, the greater the return, as interest is earned on interest more often.

3. Importance of Compounding

Details: Compounding can significantly increase investment returns over time. Starting early and allowing more time for compounding to work is often more impactful than higher contributions later.

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 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, while compound interest is calculated on principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., daily vs. annually) results in higher returns due to earning "interest on interest" more often.

Q3: What's a realistic interest rate for savings?
A: High-yield savings accounts typically offer 0.5%-5% APY, depending on economic conditions.

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

Q5: Is compound interest taxed?
A: Yes, interest earnings are generally taxable as income in the year they're credited to your account.