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 allows your investment to grow at an accelerating rate over time, making it a powerful tool for wealth accumulation.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Maturity amount (currency)
• \( P \) — Principal amount (currency)
• \( R \) — Annual interest rate (decimal)
• \( n \) — Compounding frequency per year
• \( T \) — Time in years

Explanation: The formula calculates how much your investment will grow when interest is compounded at regular intervals over a specified period.

3. Importance of Compound Interest

Details: Compound interest is fundamental to long-term investing and savings strategies. It demonstrates how small, regular investments can grow significantly over time, highlighting the importance of starting early and allowing time for your money to work for you.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, select compounding frequency, 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, leading to faster growth.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., daily vs. annually) results in higher returns because interest is calculated and added to the principal more often.

Q3: What is the rule of 72?
A: The rule of 72 estimates how long it takes for an investment to double: 72 divided by the annual interest rate gives the approximate number of years.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can cause debt to grow rapidly if not managed properly.

Q5: Is this calculator suitable for all types of investments?
A: This calculator works best for fixed-rate investments like savings accounts, CDs, and bonds. It may not accurately represent variable-rate investments or those with additional fees.