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:

• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (as decimal)
• \( n \) — Number of times interest compounds per year
• \( t \) — Time in years

Explanation: The formula calculates the total interest earned by considering how frequently interest is added to the principal balance.

3. Importance of Compound Interest

Details: Compound interest is fundamental to long-term savings and investment growth. It allows money to grow faster than simple interest because you earn returns on both your original investment and the returns you've already received.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, select compounding frequency, 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 does compounding frequency affect returns?
A: More frequent compounding (daily vs. annually) results in higher returns because interest is calculated and added to the principal more often.

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 the approximate years needed.

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: What's the best way to maximize compound interest?
A: Start early, invest regularly, choose higher compounding frequencies, and reinvest your earnings to benefit from maximum compounding effects.