1. What is the Compound Growth Formula?

The compound growth formula calculates how an investment grows over time when earnings are reinvested. It's a fundamental concept in personal finance and investing, showing how money can grow exponentially over time.

2. How Does the Calculator Work?

The calculator uses the compound growth formula:

Where:

• \( FV \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of years the money is invested

Explanation: The formula accounts for exponential growth where each period's earnings generate their own earnings in subsequent periods.

3. Importance of Compound Growth

Details: Understanding compound growth helps with retirement planning, investment decisions, and appreciating the value of starting to save early. Small differences in returns can lead to large differences over long periods.

4. Using the Calculator

Tips: Enter principal amount in USD, annual interest rate as a decimal (e.g., 0.07 for 7%), and number of years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How often is interest compounded in this formula?
A: This formula assumes annual compounding. For different compounding periods, the formula needs adjustment.

Q2: What's the difference between simple and compound interest?
A: Simple interest calculates on the principal only, while compound interest calculates on principal plus accumulated interest.

Q3: How does inflation affect these calculations?
A: These are nominal returns. For real returns, you'd need to subtract inflation from the interest rate.

Q4: Can I use this for monthly investments?
A: No, this calculates growth for a single lump sum. For regular contributions, you'd need the future value of an annuity formula.

Q5: Why does NerdWallet emphasize this calculation?
A: Understanding compound growth helps investors appreciate the power of long-term investing and the importance of starting early.