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 savings to grow faster than simple interest, where interest is calculated only on the principal amount.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( P \) — Principal amount (initial investment)
• \( R \) — Annual interest rate (in decimal form)
• \( n \) — Number of times interest is compounded per year
• \( T \) — Time the money is invested for (in years)
• \( A \) — Maturity amount after compounding

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

3. Importance of Compound Interest

Details: Compound interest is a powerful concept in finance that allows investments to grow exponentially over time. It's the foundation of long-term savings strategies and retirement 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 period in years.

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: The more frequently interest is compounded, the greater the returns. Daily compounding yields more than monthly, which yields more than annual compounding.

Q3: What is the Rule of 72?
A: It's a simple way to estimate how long an investment will take to double: Divide 72 by the annual interest rate. For example, at 6% interest, it takes about 12 years to double your money.

Q4: Can compound interest work against me?
A: Yes, when it comes to debts like credit cards or loans, compound interest can cause what you owe to grow rapidly if not paid off.

Q5: Is this calculator accurate for all savings accounts?
A: This calculator provides a general estimate. Actual returns may vary based on specific account terms, fees, and how financial institutions calculate interest.