Compound Interest Calculator UK Martin Lewis

Compound Interest Formula:

\[ FV = P \times (1 + r / n)^{(n \times t)} + PMT \times \left[ \frac{(1 + r / n)^{(n \times t)} - 1}{r / n} \right] \]

Initial Principal (P):

GBP

Annual Interest Rate (r):

Compounding Periods Per Year (n):

Time (t):

years

Periodic Payment (PMT):

GBP per period

Future Value (FV):

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1. What is Compound Interest?

Compound interest is 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:

\[ FV = P \times (1 + r / n)^{(n \times t)} + PMT \times \left[ \frac{(1 + r / n)^{(n \times t)} - 1}{r / n} \right] \]

Where:

\( FV \) — Future value (GBP)
\( P \) — Initial principal (GBP)
\( r \) — Annual interest rate (decimal)
\( n \) — Number of compounding periods per year
\( t \) — Time in years
\( PMT \) — Periodic payment (GBP per period)

Explanation: The formula calculates how your money grows when interest is compounded and when regular contributions are made.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning, retirement savings, and investment strategies. It demonstrates how small, regular investments can grow significantly over time.

4. Using the Calculator

Tips: Enter the initial investment amount, annual interest rate, number of compounding periods per year, time in years, and any regular contributions. All values must be non-negative.

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, the faster your money grows. Daily compounding yields slightly more than monthly, which yields more than annually.

Q3: Can I use this calculator for different currencies?
A: While the calculator displays results in GBP, the mathematical principles work for any currency as long as you're consistent with your inputs.

Q4: What if I make irregular contributions?
A: This calculator assumes regular, consistent contributions. For irregular contributions, you would need a more advanced calculator.

Q5: How accurate is this calculator for real-world investing?
A: This provides a mathematical estimation. Real-world returns may vary due to market fluctuations, fees, and taxes.