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Compound Interest Formula:
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The compound interest formula calculates the future value of an investment or savings account where interest is compounded periodically. It shows how money grows over time through the power of compounding.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your initial investment will grow based on the interest rate, compounding frequency, and time period.
Details: Understanding compound interest is crucial for financial planning, investment decisions, and maximizing savings growth over time.
Tips: Enter principal amount in USD, annual interest rate as a decimal (e.g., 0.05 for 5%), number of compounding periods per year, and time in years. All values must be positive.
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 does compounding frequency affect returns?
A: More frequent compounding (daily vs. annually) results in higher returns due to interest being calculated and added more often.
Q3: What is a typical interest rate for high-yield savings?
A: Rates vary but typically range from 0.5% to 5% annually, depending on economic conditions and the financial institution.
Q4: Are there any limitations to this calculation?
A: This assumes a fixed interest rate and consistent compounding periods, which may not reflect variable rate accounts.
Q5: How accurate is this calculator for real-world savings?
A: It provides a good estimate, but actual returns may vary due to changing interest rates, fees, or account terms.