1. What is the Compound Interest Formula?

The compound interest formula calculates the future value of an investment or savings account based on the principal amount, interest rate, compounding frequency, and time period. It demonstrates how money grows over time through the power of compounding.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future Value (GBP)
• \( P \) — Principal amount (GBP)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Compounding periods per year
• \( t \) — Time in years

Explanation: The formula calculates how much an initial investment will grow when interest is compounded at regular intervals over a specified time period.

3. Importance of Future Value Calculation

Details: Understanding future value helps in financial planning, savings goal setting, and comparing different investment options. It demonstrates the power of compound interest in wealth accumulation.

4. Using the Calculator

Tips: Enter principal amount in GBP, annual interest rate as a percentage, number of compounding periods per year, and time 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 both the principal and accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated on previously earned interest more often.

Q3: What are typical UK savings account interest rates?
A: Rates vary by institution and account type, typically ranging from 0.5% to 5% for standard savings accounts, with higher rates for fixed-term deposits.

Q4: Are savings interest rates taxable in the UK?
A: Yes, interest earned on savings is generally taxable, though there's a Personal Savings Allowance that allows basic rate taxpayers to earn £1,000 interest tax-free.

Q5: How accurate is this calculator for real savings accounts?
A: This provides a mathematical estimate. Actual returns may vary slightly due to rounding methods, account fees, or variable interest rates used by banks.