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Compound Interest Formula:
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's a powerful concept where your money grows exponentially over time, earning interest on both your original investment and the interest it has already earned.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an investment will grow over time when interest is compounded annually.
Details: Compound growth is fundamental to long-term wealth building. It demonstrates how small, consistent investments can grow significantly over time, making it crucial for retirement planning, savings goals, and financial independence.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and the number of years. All values must be positive numbers.
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 both the principal and accumulated interest.
Q2: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding. For different compounding frequencies, the formula would need adjustment.
Q3: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can cause debt to grow rapidly if not managed properly.
Q4: What's the Rule of 72?
A: A quick way to estimate how long it takes for an investment to double: 72 divided by the annual interest rate.
Q5: How can I maximize compound growth?
A: Start early, invest consistently, reinvest earnings, and choose investments with reasonable returns over time.