Money Saving Expert Compound Interest Calculator

Compound Interest Formula:

\[ A = P \times (1 + r/n)^{n \times t} \]

Principal Amount (P):

Annual Interest Rate (r):

Compounding Periods Per Year (n):

Time Period (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 savings to grow faster as interest is earned on both the original amount and the interest already earned.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times (1 + r/n)^{n \times t} \]

Where:

\( A \) — Future value of the investment/loan
\( P \) — Principal investment amount
\( r \) — Annual interest rate (decimal)
\( n \) — Number of compounding periods per year
\( t \) — Time the money is invested/borrowed for (years)

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

3. Importance of Compound Interest

Details: Compound interest is a powerful financial concept that can significantly increase savings and investments over time. Understanding compound interest helps in making informed financial decisions and planning for long-term goals.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, number of compounding periods per year, and time period 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 (e.g., monthly vs. annually) results in higher returns because interest is calculated and added more often.

Q3: What is the rule of 72?
A: The rule of 72 is a simple way to estimate how long an investment will take 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: How can I maximize compound interest benefits?
A: Start investing early, contribute regularly, and choose investments with higher compounding frequencies to maximize growth.