Compound Interest Calculator

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{R}{100 \times n}\right)^{n \times T} \]

Principal Amount (P):

currency units

Annual Interest Rate (R):

Compounding Frequency (n):

Time Period (T):

years

Final Amount (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 investments to grow exponentially over time, making it a powerful concept in finance and investing.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{R}{100 \times n}\right)^{n \times T} \]

Where:

\( A \) — Final amount (currency units)
\( P \) — Principal amount (currency units)
\( R \) — Annual interest rate (%)
\( n \) — Compounding frequency per year (unitless)
\( T \) — Time period (years)

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

3. Importance of Compound Interest

Details: Compound interest is fundamental to long-term wealth building. It demonstrates how small, regular investments can grow significantly over time due to the compounding effect, where you earn interest on both your principal and accumulated interest.

4. Using the Calculator

Tips: Enter the principal amount in currency units, annual interest rate as a percentage, select compounding frequency, 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, leading to exponential growth.

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 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. The result is the approximate number of years needed.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can cause debt to grow rapidly if not managed properly, especially with high-interest loans or credit cards.

Q5: Is compound interest taxed?
A: In most jurisdictions, interest earned through investments is subject to taxation, which can affect the net returns from compound interest.