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: The formula shows how money grows exponentially over time when earnings are reinvested.

3. Importance of Compounding Frequency

Details: More frequent compounding leads to higher returns. Daily compounding yields more than monthly, which yields more than annual compounding, even at the same annual rate.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as percentage (e.g., 5 for 5%), time in years, and select compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does compound interest differ from simple interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on principal plus accumulated interest.

Q2: What's the Rule of 72?
A: A quick way to estimate how long it takes to double your money: divide 72 by your interest rate. At 6%, money doubles in about 12 years.

Q3: How often do banks typically compound interest?
A: Most savings accounts compound daily, while CDs often compound monthly or quarterly.

Q4: Can compound interest work against me?
A: Yes, with loans and credit cards, compound interest increases what you owe over time.

Q5: What's better - higher interest rate or more frequent compounding?
A: Generally, a higher rate has more impact than more frequent compounding at a lower rate.