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Compound Interest Formula:
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often described as "interest on interest" and can cause wealth to grow exponentially over time.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an investment will grow over time when interest is compounded. Each period, interest is earned on both the original principal and previously earned interest.
Details: Understanding future value helps in financial planning, retirement savings, investment decisions, and comparing different investment opportunities. It demonstrates the power of compounding over time.
Tips: Enter present value in dollars, interest rate as a percentage (e.g., 5 for 5%), and number of compounding periods. All values must be positive numbers.
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 principal plus accumulated interest.
Q2: How often should interest be compounded?
A: More frequent compounding (daily vs. annually) results in higher returns due to the compounding effect occurring more often.
Q3: What is the Rule of 72?
A: A quick way to estimate how long it takes for an investment to double: 72 divided by the interest rate gives the approximate years.
Q4: Can this calculator handle different compounding frequencies?
A: This calculator assumes compounding occurs once per period. For different frequencies, adjust the rate and periods accordingly.
Q5: Is compound interest always beneficial?
A: While beneficial for savings and investments, compound interest works against you with debts and loans, causing them to grow faster.