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 differs from simple interest, where interest is not added to the principal for future calculations.

2. How Does the Calculator Work?

The calculator uses the compound interest formula with monthly compounding:

Where:

• \( A \) — Maturity amount ($)
• \( P \) — Principal amount ($)
• \( R \) — Annual interest rate (decimal)
• \( T \) — Time period (years)

Explanation: The formula calculates how much an investment will grow when interest is compounded monthly, with interest being added to the principal each month.

3. Importance of Compound Interest

Details: Compound interest is a powerful financial concept that allows investments to grow exponentially over time. It's fundamental to retirement planning, savings strategies, and understanding long-term investment growth.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between compound and simple 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 (monthly vs. annually) results in higher returns due to interest being calculated on interest more frequently.

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 interest rate gives the approximate number of years.

Q4: Can this calculator be used for loans?
A: While the formula is similar, loan calculations typically account for regular payments. This calculator is designed for investment growth without additional contributions.

Q5: How accurate is this calculator?
A: The calculator provides precise mathematical results based on the inputs, but actual investment returns may vary due to market conditions and fees.