Compounding Interest Calculator

Compounding Interest Formula:

\[ FV = P \times (1 + r/n)^{(n \times t)} \]

Principal Amount (P):

USD

Annual Interest Rate (r):

decimal

Compounds Per Year (n):

Time (t):

years

Future Value (FV):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Compounding Interest?

Compounding interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows investments to grow exponentially over time, making it a powerful concept in finance.

2. How Does the Calculator Work?

The calculator uses the compounding interest formula:

\[ FV = P \times (1 + r/n)^{(n \times t)} \]

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 (in years)

Explanation: The formula accounts for periodic compounding by dividing the annual rate by the number of compounding periods and multiplying the time by the same factor.

3. Importance of Compounding

Details: Compounding can significantly increase investment returns over long periods. The more frequent the compounding, the greater the returns, which is why understanding this concept is crucial for financial planning.

4. Using the Calculator

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

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 accumulated interest.

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

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 formula be used for debt?
A: Yes, the same formula applies to compound interest on loans and credit cards, showing how debt can grow over time.

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