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 often called "interest on interest" and can significantly boost investment returns over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of 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 your investment grows when earnings are reinvested and earn additional returns.

3. Importance of Compound Interest

Details: Compound interest is a powerful force in finance. It helps investors grow wealth over time and is fundamental to retirement planning and long-term financial strategies.

4. Using the Calculator

Tips: Enter principal amount in USD, annual interest rate as a percentage, time period in years, and select compounding frequency. 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 returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to more frequent application of interest.

Q3: 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 (e.g., 7% interest ≈ 10.3 years to double).

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can make debts grow rapidly if not paid down.

Q5: How can I maximize compound interest benefits?
A: Start investing early, reinvest dividends/interest, and maintain a long-term perspective.