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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. It allows savings to grow faster as interest is earned on both the original amount and the interest already earned.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your savings will grow over time with compound interest, taking into account how often the interest is compounded.
Details: Understanding compound interest helps savers and investors make informed decisions about their financial future. It demonstrates how regular savings can grow significantly over time through the power of compounding.
Tips: Enter the principal amount in GBP, annual interest rate as a decimal (e.g., 0.05 for 5%), compounding frequency (how many times per year interest is added), 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 does compounding frequency affect returns?
A: The more frequently interest is compounded, the higher the final amount will be, as interest is earned on interest more often.
Q3: Are there UK tax implications for savings interest?
A: Yes, interest earned on savings may be subject to tax, though there are allowances. Consult a financial advisor for specific tax advice.
Q4: Can this calculator be used for other currencies?
A: While the formula works for any currency, this calculator is specifically designed for GBP calculations.
Q5: What's the best compounding frequency for savings?
A: Generally, more frequent compounding (daily or monthly) results in higher returns, but you should compare different savings accounts based on their Annual Equivalent Rate (AER).