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, making it a powerful concept for savings and investments.

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 on investment due to the exponential growth effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. Even small differences in interest rates or compounding frequency can significantly impact long-term savings growth.

4. Using the Calculator

Tips: Enter the 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 APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does. This calculator shows APY effects.

Q2: How often do high-yield savings accounts compound?
A: Most compound daily, but check with your specific bank. Daily compounding yields slightly better returns than monthly.

Q3: Is this calculator accurate for CDs?
A: Yes, it works for any fixed-rate investment including CDs, though CD rates are typically locked for the term.

Q4: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your money.

Q5: How does inflation affect these calculations?
A: This shows nominal returns. For real returns, subtract inflation rate from the interest rate in your calculations.