How To Calculate Investment Growth

Compound Interest Formula:

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

Principal (P):

Annual Interest Rate (R):

decimal

Compounding Frequency (n):

per year

Time (T):

years

Future Value (A):

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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 allows investments to grow at an accelerating rate 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
\( P \) — Principal investment amount
\( R \) — Annual interest rate (in decimal)
\( n \) — Number of times interest is compounded per year
\( T \) — Time the money is invested for (in years)

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

3. Importance of Compound Interest

Details: Compound interest is a powerful concept in finance that allows investments to grow exponentially over time. Understanding compound interest helps in making informed investment decisions and long-term financial planning.

4. Using the Calculator

Tips: Enter the principal amount in dollars, 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.

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 (daily vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What is a typical compounding frequency?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).

Q4: Can this calculator handle different currencies?
A: While the calculator uses dollar symbols, the calculation works for any currency as long as consistent units are used.

Q5: Is this suitable for all types of investments?
A: This calculator works for fixed-rate investments like savings accounts and certificates of deposit, but may not account for variable rates or additional contributions.