1. What is Compound Interest?

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It's essentially "interest on interest" which makes money grow at a faster rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value of the investment
• \( Principal \) — Initial investment amount
• \( Rate \) — Periodic interest rate (in decimal)
• \( n \) — Number of compounding periods

Explanation: The formula calculates how much an investment will grow over time when earnings are reinvested to earn additional returns.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investment decisions, and retirement savings. It demonstrates the power of time in growing wealth.

4. Using the Calculator

Tips: Enter the principal amount in dollars, interest rate as a percentage (e.g., 5 for 5%), and the number of compounding periods. 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 often should interest compound for maximum growth?
A: The more frequently interest compounds (daily vs. annually), the greater the returns due to the compounding effect.

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. At 6%, money doubles in about 12 years.

Q4: Can compound interest work against you?
A: Yes, when borrowing money, compound interest can significantly increase debt over time if not paid down.

Q5: How does inflation affect compound interest?
A: Inflation reduces the real value of returns. Aim for returns that outpace inflation to achieve real growth.