Compound Interest Calculator

Compound Interest Formula:

\[ A = P \times (1 + \frac{r}{n})^{n \times t} \]

Principal Amount (P):

Annual Interest Rate (r):

Compounding Periods Per Year (n):

Time Period (t):

years

Future Value (A):

Total Interest Earned:

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1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often referred to as "interest on interest" and can significantly increase investment returns over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times (1 + \frac{r}{n})^{n \times t} \]

Where:

\( A \) — Future value of the investment/loan
\( P \) — Principal investment amount
\( r \) — Annual interest rate (decimal)
\( n \) — Number of compounding periods per year
\( t \) — Time the money is invested/borrowed for, in years

Explanation: The formula calculates how much an investment will grow over time when interest is compounded at regular intervals.

3. Importance of Compound Interest

Details: Compound interest is a fundamental concept in finance that demonstrates how investments can grow exponentially over time. It's crucial for retirement planning, investment strategies, and understanding the true cost of borrowing.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, number of compounding periods per year (e.g., 12 for monthly, 4 for quarterly), and time period 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 does compounding frequency affect returns?
A: More frequent compounding (e.g., daily vs. annually) results in higher returns due to interest being calculated more often.

Q3: What is the Rule of 72?
A: A simple way to estimate how long an investment will take to double: Divide 72 by the annual interest rate.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the total amount you owe over time.

Q5: Is compound interest taxed?
A: In most jurisdictions, interest earned through investments is subject to taxation, which affects the net return.