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 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.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for retirement planning, savings strategies, and comparing different investment options.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 4.5 for 4.5%), time in years, and select compounding frequency.

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 principal plus accumulated interest.

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

Q3: What's the "Rule of 72"?
A: A quick way to estimate how long it takes to double your money: divide 72 by the interest rate (e.g., at 6% it takes about 12 years).

Q4: Are high-yield savings accounts worth it?
A: They offer better returns than traditional savings accounts, especially valuable when interest rates are high.

Q5: How can I maximize compound interest?
A: Start early, reinvest dividends/interest, choose accounts with higher compounding frequencies, and add to your principal regularly.