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's often described as "interest on interest" and can cause wealth to grow exponentially over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

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

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

3. Importance of Compound Interest

Details: Compound interest is fundamental to long-term investing and savings. It demonstrates the power of time in wealth accumulation and is crucial for retirement planning, education funds, and long-term financial goals.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a decimal (5% = 0.05), number of compounding periods per year, and time 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 principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (daily vs. annually) results in higher returns due to interest being calculated more often on accumulated amounts.

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

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the total amount you owe over time.

Q5: How can I maximize compound interest benefits?
A: Start investing early, contribute regularly, choose investments with higher returns, and allow your money to compound over long periods.