1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest, where interest is not compounded.

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 "interest on interest" effect.

3. Importance of Compound Interest

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

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, time period in years, and select how often interest is compounded. 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. APY gives a more accurate picture of actual returns.

Q2: How often do high-yield savings accounts compound?
A: Most compound interest daily, though some may compound monthly or quarterly.

Q3: Does compound interest work the same for loans?
A: Yes, but in reverse - you pay interest on previously accumulated interest, which can make debts grow quickly.

Q4: What's the Rule of 72?
A: A quick way to estimate doubling time: divide 72 by the interest rate. For example, at 6% interest, money doubles in about 12 years.

Q5: How can I maximize compound interest?
A: Start early, invest regularly, choose accounts with higher compounding frequency, and reinvest all earnings.