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:

• \( A \) — Future value of the investment/loan
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time the money is invested/borrowed for, in 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, investments, loans, and retirement savings. It demonstrates how money can grow exponentially over time.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage, number of compounding periods per year, and time in years. 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 the principal plus accumulated interest.

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

Q3: What's the Rule of 72?
A: It's a simple way to estimate how long an investment will take to double: divide 72 by the annual interest rate.

Q4: Can compound interest work against you?
A: Yes, with loans or credit cards, compound interest can cause debt to grow rapidly if not paid down.

Q5: How can I maximize compound interest benefits?
A: Start investing early, reinvest dividends, and choose accounts with higher compounding frequencies.