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, where interest is calculated only on the principal amount.

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 due to the "interest on interest" effect.

3. Benefits of Compound Interest

Details: Compound interest is powerful for long-term savings. Even small regular contributions can grow substantially over decades due to exponential growth.

4. Using the Calculator

Tips: Enter principal in dollars, annual 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: What's the difference between APR and APY?
A: APR is the annual rate without compounding. APY includes compounding effects and shows the actual annual yield.

Q2: How often do high-yield savings accounts compound?
A: Most compound daily and pay interest monthly, but check with your specific financial institution.

Q3: 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.

Q4: Are there tax implications?
A: Yes, interest earned is typically taxable income unless in a tax-advantaged account like an IRA.

Q5: How can I maximize compound interest?
A: Start early, contribute regularly, choose accounts with higher rates, and let interest compound as long as possible.