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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 a powerful concept in investing where earnings generate their own earnings over time, creating exponential growth.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an initial investment will grow over time when interest is compounded annually at a constant rate.
Details: Compound interest is fundamental to long-term wealth building. It allows investments to grow exponentially over time, making it crucial for retirement planning, education funds, and other long-term financial goals.
Tips: Enter the principal amount in USD, annual interest rate as a decimal (e.g., 0.07 for 7%), and the number of years for the investment period. 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 both the principal and accumulated interest.
Q2: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding. For more frequent compounding, the formula would need adjustment.
Q3: What are typical returns for index funds?
A: Historically, broad market index funds have averaged 7-10% annual returns, though past performance doesn't guarantee future results.
Q4: How does time affect compound interest?
A: Time is the most powerful factor in compound interest. The longer the investment period, the more dramatic the growth due to compounding effects.
Q5: Should I consider inflation in these calculations?
A: For real (inflation-adjusted) returns, subtract the expected inflation rate from your expected return rate before calculating.