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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's often called "interest on interest" and makes a sum grow at a faster rate than simple interest.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your investment will grow over time with compound interest, taking into account how often the interest is compounded.
Details: Understanding compound interest is crucial for financial planning, savings growth, and investment strategies. It demonstrates how money can grow exponentially over time, making it a powerful concept for long-term wealth building.
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.
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 because interest is calculated and added to the principal more often.
Q3: What is the Rule of 72?
A: A quick way to estimate how long it takes for an investment to double: divide 72 by the annual interest rate.
Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the amount you owe over time.
Q5: Are there investments that offer compound interest?
A: Savings accounts, certificates of deposit (CDs), money market accounts, and many investment vehicles offer compound interest.