1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often called "interest on interest" and makes money grow at a faster rate compared to simple 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 on investment due to the compounding effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It demonstrates how investments grow over time and why starting early can significantly increase your returns.

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 simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal and 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 compounding effect.

Q3: What's a realistic interest rate for savings accounts?
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, invest regularly, choose accounts with higher interest rates and more frequent compounding.

Q5: Is compound interest always beneficial?
A: While it helps savings grow, it works against you with debt (credit cards, loans) where interest compounds on what you owe.