1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. It allows your investment to grow at an accelerating rate over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( P \) — Principal amount (initial investment)
• \( R \) — Annual interest rate (in decimal form)
• \( T \) — Time the money is invested for (in years)
• \( A \) — Maturity amount after compound interest

Explanation: The formula calculates how much your investment will grow when interest is compounded annually, taking into account both your initial principal and accumulated interest.

3. Importance of Compound Interest

Details: Compound interest is a powerful concept in finance that allows investments to grow exponentially over time. It's fundamental to retirement planning, long-term savings, and understanding the true cost of borrowing.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time in years. 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 both the principal and accumulated interest.

Q2: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding, meaning interest is calculated and added to the principal once per year.

Q3: Can I use this for monthly compounding?
A: No, this calculator is specifically designed for annual compounding. For monthly compounding, a different formula would be needed.

Q4: What is the rule of 72?
A: The rule of 72 is a quick way to estimate how long it takes for an investment to double: divide 72 by the annual interest rate percentage.

Q5: How does compounding frequency affect returns?
A: More frequent compounding (monthly vs annually) results in higher returns due to interest being calculated on accumulated interest more often.