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Compound Interest Formula:
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. It allows your investment to grow at a faster rate than simple interest, which is calculated only on the principal amount.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your investment will grow when interest is compounded monthly, taking into account both your initial investment and the accumulated interest over time.
Details: Compound interest is a powerful concept in finance that can significantly increase your wealth over time. It's essential for retirement planning, investment strategies, and understanding the true cost of borrowing.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time in years. All values must be positive numbers.
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 often is interest compounded in this calculator?
A: This calculator compounds interest monthly (12 times per year).
Q3: Can I use this calculator for different compounding periods?
A: This specific calculator is designed for monthly compounding. Different formulas are needed for other compounding frequencies.
Q4: What is the rule of 72?
A: The rule of 72 is a quick way to estimate how long it takes for an investment to double: divide 72 by the annual interest rate.
Q5: How does compound interest affect loans and debt?
A: Compound interest can cause debt to grow rapidly over time, making it important to pay off high-interest debts quickly.