1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest, where interest is not compounded.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time the money is invested for (years)

Explanation: The formula calculates how much an investment will grow over time when interest is compounded at regular intervals.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, as it demonstrates how investments grow over time and the power of reinvesting earnings.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a decimal (e.g., 0.05 for 5%), number of compounding periods per year, and time in years.

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 the principal plus any accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding leads to higher returns. Daily compounding yields more than monthly, which yields more than annual compounding.

Q3: What are typical compounding periods?
A: Common periods include annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), or daily (365).

Q4: Can this calculator be used for loans?
A: Yes, the same formula applies to loans where interest compounds, though most consumer loans use simple interest.

Q5: What's the Rule of 72?
A: A quick way to estimate doubling time: divide 72 by the interest rate (as a percentage). The result is approximate years to double your investment.