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:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( r \) — Annual interest rate (as decimal)
• \( n \) — Number of times interest compounds per year
• \( t \) — Time in years

Explanation: The formula calculates how much your investment grows when interest is earned on both the principal and accumulated interest.

3. Importance of Compound Interest

Details: Compound interest is a fundamental concept in finance that demonstrates the power of long-term investing. It's crucial for retirement planning, savings growth, and understanding investment returns.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, select compounding frequency, and time period. 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.

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 annual interest rate.

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: Is this calculator suitable for all investments?
A: This calculator works for fixed-rate investments. For variable-rate investments or those with fees, actual results may differ.