1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows savings to grow at a faster rate compared to 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:

• \( A \) — Maturity amount ($)
• \( P \) — Principal amount ($)
• \( R \) — Annual interest rate (decimal)
• \( n \) — Compounding frequency per year
• \( T \) — Time period in 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: Understanding compound interest is crucial for financial planning and wealth building. It demonstrates how small, regular investments can grow significantly over time due to the power of compounding.

4. Using the Calculator

Tips: Enter 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 compounded), 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 (daily vs. annually) results in higher returns because interest is calculated and added to the principal more often.

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

Q4: Can I use this for different currencies?
A: Yes, the calculator works with any currency as long as you're consistent with the principal amount and result interpretation.

Q5: Is this calculator accurate for real-world savings accounts?
A: While the formula is mathematically correct, actual bank accounts may have different compounding methods, fees, or minimum balance requirements that affect final amounts.