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Compound Interest Formula:
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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.
The calculator uses the compound interest formula with monthly compounding:
Where:
Explanation: The formula calculates how much your investment will grow when interest is compounded monthly, meaning interest is added to the principal each month.
Details: Understanding compound interest is crucial for financial planning, investment decisions, and retirement savings. It demonstrates how small, regular investments can grow significantly over time.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time in years. All values must be positive numbers.
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 should interest be compounded for maximum growth?
A: The more frequently interest is compounded, the faster your money grows. Continuous compounding provides the maximum growth potential.
Q3: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the amount you owe over time.
Q4: What is the Rule of 72?
A: It's a simple way to estimate how long it takes for an investment to double: 72 divided by the annual interest rate.
Q5: How does inflation affect compound interest returns?
A: Inflation reduces the real purchasing power of your returns. It's important to consider real returns (nominal return minus inflation).