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:

• \( Principal \) — Initial amount (KES)
• \( Rate \) — Annual interest rate (decimal)
• \( Compounds \) — Number of compounding periods per year
• \( Time \) — Time the money is invested for (years)

Explanation: The formula calculates how much your investment grows when interest is earned on both the principal and accumulated interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investment decisions, and comparing different savings or loan products in Kenya.

4. Using the Calculator

Tips: Enter principal in KES, rate as decimal (e.g., 0.1 for 10%), compounds per year (e.g., 12 for monthly), and 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 often should interest compound for maximum growth?
A: The more frequent the compounding (daily > monthly > yearly), the greater the returns, though the difference diminishes with very frequent compounding.

Q3: What's a typical interest rate in Kenya?
A: Rates vary by institution and product type, typically ranging from 5% to 15% for savings accounts in Kenyan shillings.

Q4: Does this calculator account for inflation?
A: No, it calculates nominal returns. For real returns, you'd need to subtract inflation from the interest rate.

Q5: Can I use this for loan calculations?
A: Yes, the same formula applies to loans with compound interest, though most Kenyan loans use simple interest or monthly reducing balance methods.