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 a powerful concept in finance where your money grows at an accelerating rate over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of the investment/loan
• \( P \) — Principal investment amount (initial deposit)
• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Number of years the money is invested/borrowed

Explanation: The formula calculates how much an investment will grow over time when interest is earned on both the initial amount and the accumulated interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning, retirement savings, and investment strategies. It demonstrates how small, regular investments can grow significantly over time.

4. Using the Calculator

Tips: Enter the principal amount in pounds, annual interest rate as a percentage, number of compounding periods per year, 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 often should interest be compounded for maximum growth?
A: The more frequently interest is compounded, the faster your money grows. Daily compounding yields the highest returns, followed by monthly, quarterly, and annually.

Q3: Is compound interest applicable to savings accounts in the UK?
A: Yes, most UK savings accounts use compound interest, though the compounding frequency may vary between providers.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the amount you owe over time, especially with credit cards and loans.

Q5: How does inflation affect compound interest returns?
A: Inflation reduces the real purchasing power of your returns. It's important to seek interest rates that outpace inflation to achieve real growth.