Compound Interest Calculator Bank Account

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Principal (P):

USD

Annual Interest Rate (r):

unitless

Compounds Per Year (n):

unitless

Time (t):

years

Future Value (A):

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1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's what makes bank accounts and investments grow over time, as you earn "interest on interest."

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Where:

\( A \) — 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 shows how your money grows when interest is added to the principal at regular intervals, creating exponential growth over time.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It helps you estimate how investments will grow over time and demonstrates the power of starting to save early.

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. 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 often do banks typically compound interest?
A: Common compounding frequencies include daily, monthly, quarterly, or annually, depending on the account type.

Q3: Why does compounding frequency matter?
A: More frequent compounding leads to higher returns because interest is calculated on a growing balance more often.

Q4: What's the Rule of 72?
A: A quick way to estimate how long it takes to double your money: divide 72 by the interest rate (as a percentage).

Q5: Can this calculator be used for loans?
A: While the formula is similar, loans typically have additional factors like fees that this calculator doesn't account for.