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 described 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:

• \( A \) — Future value of the investment/loan
• \( P \) — Principal investment amount (initial deposit)
• \( r \) — Annual interest rate (in decimal form)
• \( t \) — Time the money is invested for in years

Explanation: The formula calculates how much an investment will grow when interest is compounded annually. The interest earned each year is added to the principal, creating a larger base for the next year's interest calculation.

3. Importance of Compound Interest

Details: Compound interest is a fundamental concept in finance that demonstrates the power of long-term investing. It's crucial for retirement planning, savings growth, and understanding the true cost of loans.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time period in years. 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 is interest compounded in this calculator?
A: This calculator assumes annual compounding. For more frequent compounding, the formula would need adjustment.

Q3: What is the rule of 72?
A: The rule of 72 estimates how long it takes for an investment to double: 72 divided by the annual interest rate gives approximate years to double.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can significantly increase the total amount you owe over time.

Q5: How can I maximize compound interest benefits?
A: Start investing early, contribute regularly, and choose investments with competitive returns to maximize the power of compounding.