1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often referred to as "interest on interest" and can cause wealth to grow exponentially over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (in decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time in years

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

3. Importance of Compound Interest

Details: Compound interest is a powerful financial concept that allows investments to grow exponentially over time. It's the foundation of long-term wealth building and retirement planning.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate, number of compounding periods per year, and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does compounding frequency affect returns?
A: More frequent compounding (monthly vs. annually) results in higher returns because interest is calculated and added to the principal more often.

Q2: 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 both the principal and accumulated interest.

Q3: How can I maximize compound interest?
A: Start early, invest regularly, choose investments with higher compounding frequencies, and reinvest your earnings.

Q4: Does compound interest work against you with debt?
A: Yes, compound interest works against you with loans and credit cards, causing debt to grow faster if not paid down regularly.

Q5: What is 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. For example, at 6% interest, it takes about 12 years to double your money.