1. What is the Compound Interest Formula?

The compound interest formula calculates the future value of an investment or loan where interest is earned on both the initial principal and the accumulated interest from previous periods.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (in decimal)
• \( n \) — Number of compounding periods

Explanation: The formula accounts for exponential growth of money due to interest being earned on previously accumulated interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investment decisions, and loan management. It demonstrates how investments grow over time and the true cost of borrowing.

4. Using the Calculator

Tips: Enter principal amount in dollars, interest rate as a percentage (e.g., 5 for 5%), and number of compounding periods. 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?
A: More frequent compounding (daily vs. annually) results in higher returns. The calculator assumes each period compounds once.

Q3: What are typical compounding periods?
A: Common periods include annually, semi-annually, quarterly, monthly, or daily, depending on the financial product.

Q4: Can this formula be used for debt?
A: Yes, it works the same way for loans and credit cards, showing how debt grows with compound interest.

Q5: How does inflation affect compound interest?
A: Real returns should account for inflation. A 5% return with 2% inflation gives a real return of ~3%.